axcess.me™

a Calm Discussion about Iran

Eagle Watch — Fri, 03 Feb 2012 10:40:42 GMT

There are five seemingly unrelated issues regarding American relations with the Islamic Republic of Iran. First among them is the fact that Iran has been in an unresolved state of war against the Untied States since the Embassy takeover in 1979. It should be remembered that, up until September 11 2001, Hizbollah, an Iranian creation that is funded and armed from Tehran, had killed more Americans than all other terrorist groups combined. We ignore this state of affairs. That fact projects an image of national weakness in the Persian mind. And that fosters an environment favorable to miscalculation.

The obvious issue between us is the nuclear one. The problem here is one of a flawed Nuclear Non-Proliferation Treaty, negotiated in more innocent times. Iran, or any other signatory, can produce all the pieces of a uranium fission warhead, and not be in violation of NPT unless and until the pieces are assembled into a warhead. This is a condition known as being “a screw away,” and is what the world assumed of Israel for about 20 years[1]. The threshold technology permitted under the Treaty is the fuel cycle – allowing non-nuclear powers to master the enrichment and reprocessing of non-fissionable uranium or spent reactor fuel into fuel pellets (or, further enriched, into weapons-grade material). At the time the Treaty was written, there were only four nuclear powers – Britain, France, the Soviet Union and the United States, and if they were grandfathered-in as the only nations allowed to process or reprocess nuclear materials, things would be greatly simplified today.

Two things to consider here: the geopolitical value of nuclear ambiguity; and, the difference between being able to build a nuclear explosive and building a deliverable warhead. Israel has played the ambiguity card expertly during her various disputes with her neighbors – no one willing to take steps thought to cross a line that might provoke Israel into using nuclear weapons (if they had them). Though it’s still not confirmed (no Israeli test of a nuclear device has ever been detected), it is assumed they have mastered the design and manufacture of deliverable nuclear warheads. The point is, look at how the rest of world has to treat Iran now, knowing that they might be on the brink of developing them. Might. Ambiguity.

DPRK is an excellent example of the second conundrum in dealing with emerging nuclear states. We know they have tested two devices, one generally thought to be a “fizzle,” or partial detonation. That is technically challenging enough, but it is only the first half of the task. Ever see “the Gadget” device built at Alamogordo [NM] to see if the Manhattan Project figured out how build a fission weapon? It’s huge, with detonation circuitry exposed and sequencers hard-wired to the control bunker 5.7 miles away. It had an estimated yield of 20KT (the explosive equivalent of 20,000 tons of TNT). The “Little Boy” linear bomb that was dropped on Hiroshima 20 days later exploded with a yield of 14.2KT. We had reduced the physics package into a smaller, deliverable bomb that was 71% as efficient as the technology tester[2]. It’s a lot harder now that miniaturization is drastically increased by having to place the physics package into a re-entry vehicle and must be sequenced and detonated in the terminal phase over the target hundreds (or thousands) of miles away. We still have no evidence, for instance, that DPRK has produced a single deliverable warhead.

Iran could be bluffing all the way – playing with the West while extracting as many concessions as it can before we find out nothing’s behind the curtain. This would fit the Middle Eastern mindset as how to manipulate what they view as a weak adversary. Iran could be setting up to produce fissile uranium to use as terror weapons against the West, using Hizbollah or others to actually carry out dirty-bomb or contamination raids. Iran could be gaining the expertise to get a screw away, breaking out with an actual nuclear weapon only if existentially threatened with destruction. Iran could be in a full-fledged rush to clandestinely develop a deliverable nuclear weapon. Evidence to date supports any of these scenarios, needing more insight into the intent of the ruling mullahs to strengthen or weaken arguments favoring each possibility. My own personal view is that Iran is trying to develop a deliverable nuclear weapon to use in their campaign to dominate the Greater Middle East – not to use by deployment, rather using it to intimidate Sunni states to accept Iranian regional hegemony.

Another problem area with Iran is our use of diplomatic negotiations. In this arena, the West is from Venus and Iran is from Mars – we just don’t understand the Middle Eastern mind. A large part of the problem is that, culturally, the Arab/Persian mindset is still Old Testament while the Western mindset is more Alice in Wonderland. We try to contractually bind a rogue state to more normative behavior through a series of give-and-take agreements. Arabs/Persians try to buy time to complete the objected-to task by negotiating with their adversary. They don’t, by Western definition, negotiate in good faith. We saw this in the European-led five-year effort to negotiate an end to Iran’s nuclear activities. As we were talking, they were accelerating their efforts.

The West has never negotiated from a position of strength – neither Europe nor the United States trusts Iran not to retaliate violently if pressed – and Tehran knows it. Iran has always been the stronger party at the negotiating table, and the strongest always wins. International negotiations are contests of will, and Iran knows that the West is weak-willed. This is especially true of Arab/Persian adversaries, who disdain the Western tradition of negotiation as a sign of weakness. Their culture sees no moral wrong in lying or ignoring obligations to “outsiders.” The only way to successfully negotiate with a hostile interlocutor is when the hostile interlocutor is the one who needs to negotiate.

Just as negotiating with Iran is a waste of time, our fixation on sanctions is inappropriate given the closing window on accomplishing the goal – getting Iran to forego their nuclear program. Again, DPRK demonstrates the futility of trying to target sanctions when dealing with a despotic authoritarian regime. The people always bear the brunt because the goods flow to the people through the hierarchy, and the hierarchy isn’t going short themselves in such a regime.

Iran has to be slicker with it than DPRK because the Iranian people are better educated and more sophisticated than the public in DPRK, but nonetheless, sanctions aimed at the Revolutionary Guard will not hurt them, only create shortages in the marketplace. This is balanced by the aforementioned populace, which has already rioted in the recent past (2009), and could do so again, bringing on brutal repression. This would have the same chilling effect that Tiananmen Square had on Chinese relations for years. The West also has to be cautious to see that the Iranian people don’t resent the West more for imposing hardship than resenting the regime for bringing it on.

Sanctions take a long time to actually pressure a regime, more so if they can’t be enforced – if there’s a Russia or PRC willing to penetrate the sanctions, supplying contraband to the regime. Part of the problem is that the West always begins with symbolic sanctions (rather than ones that will actually punish the target state), and work their way up to meaningful ones, and it’s the meaningful ones that take time to work. So the first few years of sanctions are actually wasted, only serving to let the target state to continue the objected-to behavior while the sanctioning states feel good about taking action. We should have targeted gasoline imports and banking activity years ago, but we didn’t, and so we are in the position of implementing sanctions that can’t work before Iran could develop a workable nuclear device. Style over substance has cost the West any chance of having sanctions work.

We are out of non-kinetic means of persuading Tehran to do something they see as being in their strategic national interest. Not going to happen.

And finally, the Iranian political structure gives them an additional ploy unavailable to most states – the Iranian President is only a figurehead used by the ruling mullahs as the “face of Iran.” They can sacrifice the president to public opinion or international pressure without affecting policy in any way. Style over substance. This “dramatic” change would, again, give Iran time in the public domain before the West figures out that nothing has changed. As noted above, time is what we are running out of. There is a growing consensus that Iran now has enough low-enriched uranium (LEU, or ~3% reactor grade) to further enrich into enough high-enriched uranium (HEU ≥90% weapons grade) to build four warheads. Tehran announced last month that they had successfully enriched some HEX (uranium hexafluoride) to 20% enrichment, a level used for medical applications, demonstrating their ability to enrich beyond the reactor fuel level.

Iran is led by an extreme warrior sect of a minority sect of Islam. They are engaged in a religious war against Sunnis, in particular, and the infidel West, in general, and see America as a decadent oaf that lacks the savvy or political will to protect itself. Nothing we are doing negates that impression.

The ruling mullahs practice an apocalyptic flavor of Shi’ite Islam that awaits the promised return of “the Twelfth Imam,” Muhammad ibn al-Ḥasan al-Mahdī, who was born in 869 but believed not to have died but “hidden” by God to return someday in order to bring the world to Islam and peace to all. This, they believe, will be brought about by cataclysmic upheaval around the world. A dangerous religious dogma for a nation clandestinely seeking to develop nuclear weapons.

This isn’t about a nation’s rights any more than preventing a delusional psychotic from acquiring a gun is about the Second Amendment. A nation’s sovereignty, ultimately, is permitted by the other sovereign nations. This is a state led by a ruling council that entertains a defining religious justification for worldwide mayhem and sees a geopolitical advantage in regional instability. They are technically rational – adhering to a philosophically consistent behavior – but that philosophy is utterly alien to us, and thus they appear to act in unpredictable ways. We don’t understand them, and that is saturated with miscalculation.

Iran’s rhetoric is bellicose but their actions tend to be rather conservative – they see no advantage (religious or geopolitical) in being destroyed without the conflagration going worldwide. They covet being able to control the price of oil, but the Saudis do that through their dominance of OPEC. They know they can’t really close the Strait of Hormuz because America and Europe would annihilate their navy and air force. But all is answered (in their eyes) if they were nuclear-armed. Western retaliation would be all but eliminated if Iran had nuclear weapons, even more so if they had demonstrated the willingness to use them – favoring a public test as soon as they have developed a testable device, and open threats to use them in regional disputes. They could, in their view, close the Strait at will with impunity, thus controlling the price of oil, thus gaining regional dominance.

Iran is not going to be talked or sanctioned out of developing nuclear weapons. If anyone is actually serious about Iran “not being allowed” to acquire them, they are gong to have to be stopped. Containment and deterrence of a nuclear Iran is as misguided as are negotiations and sanctions, because, again, we simply do not understand how they think.

Israel has two dogs in this fight – Iran has repeatedly proclaimed its intention to “wipe Israel off the map;” and, they are convinced that President Obama isn’t going to do anything whatsoever to stop Iranian from getting a bomb. This plays into the situation because, again, we are running out of time, and our timeframe is different from that of Israel. We see the red line as producing a workable device; Israel sees the red line as moving their production facilities into Qom (or some other buried facility impervious to air attack). Israel’s window is closing faster than ours. Any action taken against Iran on Iranian soil will be interpreted by them as being an American-Israeli operation and will unleash retaliation against both.

[1] It is now assumed that Israel has ~200 assembled warheads, probably stored separately from their delivery vehicles.

[2] Although the same amount of uranium was used in Little Boy as in the Gadget, the actual bomb utilized the simpler, linear gun type of bringing the fissionable material into critical mass – the beginning of the chain reaction. The Gadget used the implosion method of compressing a hollow sphere of fissionable material into critical mass. The difference in detonation “stretch” – the amount of time the material was critical before it blew itself apart – was only micro-seconds, but enough to reduce the yield by 29%.

the “Green” Movement

Eagle Watch — Mon, 30 Jan 2012 12:52:00 GMT

The highly publicized – first by the White House, now by the media – “Green Movement,” which subsidizes alternative energy while strangling hydrocarbon-based energy, is a near-perfect example of why government is the worst source for making generalized economic policy.

First, on broad-stoke issues. Assuming that we need to rid ourselves of hydrocarbon-based energy, and that we must do it now, politicians offer nothing substantive beyond the statement itself. The assumption is accepted as axiomatic. There should be a rational conversation on both halves of that assumption – that change is necessary, and that change must occur now.

Assuming that we must wean from hydrocarbon-based energy, given the current state of alternative energy technology, how long will it take for viable alternatives to be in a position to replace hydrocarbons for transportation, electrical power generation and winter heating without severely stunting GDP, all other things being equal? In other words, how long do we have to ramp-down oil and gas use? Again, two parts – how long will it take, and how much will it cost?

Government is functionally silent on both parts. In public, politicians act as though we can do it tomorrow if we just let go of gasoline and incandescent light bulbs; and, of course it will cost more, but it’s worth it. In reality, they are clueless on the first part and indifferent to the second.

We have a test-case for following the administration’s blueprint for rapid adoption of existing alternative energy sources: Spain. Europe’s current policy and strategy for supporting the so-called “green jobs” or renewable energy dates back to 1997, and has become one of the principal justifications for [our] “green jobs” proposals. Like politicians everywhere, the Spanish government phased-in their proposals over a five-year period, so it wasn’t really in effect until 2002. How did “green jobs” do? In 2002, unemployment is Spain was 11.3% - normal for heavily socialized and taxed Europe – and in 2008 (the year that the global recession hit in November) it was 13.9%. It is now over 20%.

Turns out that a rush to “Green Energy” cost the conventional economy 2.1 jobs for every “Green” job created. Everything touched by the “Green Economy” rose in cost. Spain is now functionally bankrupt (next in line after Greece). Just when they need to return to oil and gas to reduce costs, their dismantled hydrocarbon sector is in no position to resume supplying oil and gas at pre-Green levels, and they can no longer afford to import enough to take up the slack. Spain’s energy sector has turned gangrenous.

“No matter,” says our administration, “we’ll do it better.” The early signs are not encouraging.

First, we mandated that ethanol be blended into gasoline in the US, and subsidized its production from corn – “Brazil has almost completely transformed their automotive use over to ethanol-burning cars,” we were told. The subsidy made it more profitable to grow corn to burn than to grow corn to eat, so other crops were ignored to plant more corn, meaning that our foodstuffs exports plummeted, causing increased hunger and food riots in south Asia and Indonesia (and, incidentally, increased trade deficits). Other users of ethanol, mainly the plastics and pharmaceutical industries, find one of their basic feed stocks suddenly scarcer, raising their cost of production, raising their price to consumers. This “let’s burn food” policy is now recognized as a misstep, but the agricultural states who benefit from the subsidies won’t readjust their practices back toward growing for food and export, and their congressional delegations won’t vote to end the subsidies. In other words, we’re stuck with a poorly thought-out policy that is costly and dysfunctional.

After the West Wing took over General Motors, it saw a two-birds-one-stone opportunity if it insisted that Chevrolet rush its Volt electric car out as a hybrid, giving buyers a $7,500 rebate. The car, a converted $18,000 Cruze, costs ~$40,000 after the rebate, doesn’t perform as well, and has sold fewer than 8,000 (GM had estimated 10,000 cars sold by the end of 2011). Add to that, National Highway Safety Board testing has resulted in three battery pack fires after side-crash tests. All Volts have been recalled for adjustments to the liquid-cooled batteries, and loaners given to owners who request them. Total cost of this hasn’t been released, but the math is fairly straight forward – research and development of the fix, plus dealers’ time in applying the fix, plus rental cost per diems for those requesting a loaner. It will be in seven figures.

And of course, there’s Solyndra, Beacon Power, and Ener1 bankruptcies, costing over $660 billion with no successes to show for God know how much more taxpayer money. All of these examples – ethanol, GM and solar/biofuels/batteries – show what has been widely known all along: politicians are abysmal at picking winners and losers in the marketplace. They don’t make business or economic decisions, they make political ones.

On the other side of the equation, EPA is, as I write, formulating regulations that will render coal mining and coal-generated electricity non-profitable far faster than we can replace them. The administration’s plan for forcing the market to adopt inferior technology is to outlaw what works, making available energy more expensive than the experimental sources it favors. The net losers? Us – the people who use energy in their daily lives, or use the things that use energy in their production and transportation (read: everything).

Any sane examination of the energy problem would seek a way to increase private research and development in alternative energy, while expanding domestic oil and gas production to bridge the gap until reliable, cost-effective new energy sources are brought on-line, and updating our fragile electric grid which simply can’t add America’s cars to existing industrial and domestic electricity use. None of this is finding its way into this administration’s thinking.

Regardless of the goodness of the intent, the execution of this administration’s energy policy is profoundly wrongheaded in demonstrable ways, and will result in quite predictable and profoundly costly failure.

Dr Gabriel Calzada Álvarez, et al, Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 27 2009, p. 1.

CIA World Factbook, Central Intelligence Agency, January 1 2011, p. 344.

Alvarez, pp. 27-29.

Headed Straight for the Reef

Eagle Watch — Mon, 23 Jan 2012 17:56:51 GMT

We all watch in horror the tragedy of the cruise ship aground off Giglio Island. “Inexcusable!” is the universal cry. “Those reefs are on my chart,” says veteran sailor and FOX News host Geraldo Rivera. Anyone else see President Obama as Captain Schettino, America as the Costa Concordia, and self-absorbed Euro-style social democracy as the well-charted Giglio reef?

Virtually everything that Republicans warned us about is happening – a jerk to the left in the trajectory of America: healthcare designed to become nationalized; Iran accelerating toward a nuclear weapon; a gutting of the military; the abandonment of Iraq and predictable descent into chaos (and soon Afghanistan, and the embracing of the Taliban); the abandonment of Israel and embrace of Hamas and Fatah; discomfort with America being a superpower; Keynesian economics run wild; the punishing of success and reward of failure; on and on ad nauseum. Meanwhile, the President’s European model is sinking as they frantically bail out Greece’s stateroom, throwing the water into Germany’s. The reefs are well-charted, and yet we set-sail straight for them.

Newt Gingrich (and then Mitt Romney, and then Rick Santorum) is right in that this is truly a pivotal election. The last one disruptively changed the direction of America, and it must be reset before it’s too late – before we hit the reef of economic and diplomatic self-destruction. Gingrich compares it to Lincoln’s re-instatement of the Union, but I also see it as akin to Reagan’s recapturing momentum from President Carter’s disastrous agenda of denuding the military while pursuing policies resulting in double-digit unemployment, double-digit inflation and double-digit interest rates.

We are headed for unsustainability and that needs to be changed before we drift into blissful disaster.

We are nearing the twin reefs of majority dependency and majority [income-tax] non-participation. That combination will give politicians a free hand to build personal fiefdoms at the expense of sound national policy. We are living the practical results of entitlement mentality. The collapse of the housing bubble was set in motion by the liberal desire to make home ownership more of a right than an earned option, and they accomplished this by using one of their favorite ploys – the sock-puppet of class warfare. “The rich bankers and realtors,” the narrative went, “are denying minorities affordable loans by ‘red-lining’ their neighborhoods for exclusion of consideration.” The fact of the matter was that bankers (and therefore realtors) were unwilling to extend ownership to those unable to service the debt. Laws were changed, banks were coerced, and “fairness” became loans to people who couldn’t afford them. This went on for thirty years, until the pyramid could no longer support itself and the housing market collapsed. Know who the liberals blamed? The bankers and realtors!

The same fundamental flaw in the housing debacle is present in ObamaCare. You can’t make a right out of somebody else’s labor – the market has to be so distorted to support that surreal idea that it dysfunctions to the point of self-destruction. The difference between housing and healthcare is that ObamaCare is poised to bring down the American economy. In their normal obsession for implementing an idea regardless of the actual consequences, liberals have now saddled us with a sweeping new entitlement program just as Baby Boomers are retiring en masse – fewer workers per retiree every day. We are doing to ourselves what we did to the Soviet Union – give the economy an impossible imperative. This is all happening during a financial crisis that hasn’t yet been resolved – what happens in Europe will echo in our economy.

We need to steer back into clear waters before we hit a shoal we knew was there.

Creative Destruction

Eagle Watch — Mon, 16 Jan 2012 14:26:00 GMT

Newt Gingrich and others are making a lot of noise about Mitt Romney’s time as managing partner at Bain Capital, a private equity firm. This is disappointing coming from Mr Gingrich because he knows better. It’s the first time that I know he is being disingenuous with the voters, and it damages his earlier effort at speaking truth to those who would listen. I question his decision to go negative in the first place, but the way he has chosen to do so all but eliminates him for my consideration as being deserving of the office he seeks.

The charge is that Mr Romney presided over a company that, by and large, bought control of companies to drain them of worth, fire everybody and sell the remaining assets, generating an overall profit for the effort. He then points out a couple of companies that seem to match that description.

That is nothing short of cheap demagoguery.

Bain Capital, as a private equity company, specializes in turn-a-rounds – buying troubled companies, jettisoning the unproductive aspects, and reorganizing the working parts into a profitable company which it then seeks to sell to owners interested in operating the company from there. Most of the time they succeed, and the reorganized company goes on to grow and hire and produce wealth. Some do not, and they end up in bankruptcy (which is where they were headed before Bain – or any private equity firm – came in to try and save it).

The critics never mention Domino’s Pizza and Staples, Bain Capital’s two largest successes that, between them, have created a couple of hundred thousand jobs and created billions of dollars of new wealth. Yes, 22% of Bain’s acquisitions have failed. That means, of course, that 78% of them have not, and that is typical of the private equity industry, whose economic function is to save companies that are faltering for whatever reason. It’s a different undertaking than venture capitalism – which provides seed money for new startup companies – and “corporate raiders” – whose activities resemble those described by critics of Mr Romney’s tenure at Bain Capital.

Arthur Rock is a quintessential venture capitalist. He invested $100,000 in a startup (Intel) in exchange for “eight points” – 8% of the nascent company. One would probably need one of their microprocessors to figure what eight percent of ground-floor Intel is worth today, but that is the idea behind venture capitalism: to absorb the risk of a good idea propagated by good people and enjoy the reward if it succeeds. Carl Icahn is a primary example of a “corporate raider.” He takes over companies to “flip” them – to extract the maximum amount of money from a failing venture, normally by “piecing it out.” They are noticeable by their proclivity for hostile takeovers, where they take control of a company against the wishes of the current owners – a practice not exhibited by private equity firms.

I would expect these anti-business arguments from Democrats – especially the anti-business Democrats now in power – but not from Republicans – especially those claiming to be conservatives. Disappointing.

Mr Rock also underwrote $2.5 million in convertible debentures, an arcane financial instrument which he used in an unconventional way – forgiving them as they were “paid back” in lieu of the 8% ownership stake.

the Two Firsts Produce a First

Eagle Watch — Wed, 11 Jan 2012 21:48:41 GMT

Mitt Romney became the first Republican non-incumbent to win both Iowa caucuses[1] and New Hampshire primary contests. While this provides great momentum (and that’s no small thing in political campaigns), it by no means anoints him.

Returns from 69% of New Hampshire precincts showed Mitt Romney with 38% of the vote, followed by Texas Representative Dr Ron Paul with 24%, former Utah Governor Jon Huntsman with 17%, former House Speaker Newt Gingrich and former Pennsylvania Senator Santorum with 10% each, and Texas Governor Rick Perry, who didn’t really campaign in New Hampshire, got 1%[2]. Romney’s win was worth 7 delegates to the Republican National Convention next summer, Paul earned 3 and Huntsman 2. That brings totals after two contests to Romney with 20 delegates, Santorum with 12, Paul with 3 and Huntsman with 2. It will take 1,144 delegates to win the nomination.

As interesting to political strategists as the horse race itself are the exit polls, which ask the all important “why did you vote the way you voted” questions. AP and the network pool had polling conducted among 2,670 voters[3]. Sixty-one percent of respondents said that “the economy” was their most important concern, and another 24% cited “the deficit” as theirs.

Fully a third of voters noted as most important to them the nomination of someone who could beat President Obama in November, and Romney won this group overwhelmingly. Another quarter of voters said that experience was the most important attribute in a candidate, and Romney and Huntsman split these voters.

Twenty-two percent cited “moral character” as their criterion, and Ron Paul won this category. Unusual for a sitting politician to be thought of as “moral,” but I think this is attributable to his unwavering message, which is virtually unchanged for 30 years. This is also partially attributable to the intense loyalty of his followers, which borders on fanaticism.

Thirteen percent of those interviewed said they were looking for a “true conservative,” and Ron Paul won most of these voters. This reflects the “tit-for-tat” thinking that surfaces when it is perceived that an extreme has been detected (the Obama-Pelosi-Reid administration), and reacts by wanting to counter with the opposite extreme (Ron Paul).

In and of themselves, none of these figures is surprising from a party out of power, but the mosaic illuminates the theme that Republicans should emphasize: the economy; deficit/debt, and experience will resonate with a plurality of primary voters in this cycle. For the general, the administration’s amorphous foreign policy should also be in play.

On to South Carolina and Florida!

[1] FYI, 14 states use the caucus system to select delegates (electoral votes) [Republican delegates]: Alaska (3) [27], Colorado (9) [36], Idaho (4) [32], Iowa (6) [28], Kansas (6) [40], Maine (4) [24], Minnesota (10) [40], Nebraska (5) [35], Nevada (6) [28], North Dakota (3) [28], Texas (38) [155], Utah (6) [40], Washington (12) [43] and Wyoming (3) [29]. A total of 115 electoral votes (271 needed to win) and 585 delegates [1,144 needed to win].

[2] See David Espo and Steve Peoples, Romney sweeps NH to cement top status; Paul second, Associated Press, January 11 2012.

[3] This sample-size yields a margin of error of ±3 percentage points at a 90% degree of confidence.

It’s Hard Hat Time Yet Again!

Eagle Watch — Mon, 09 Jan 2012 12:45:00 GMT

According to USAF’s Strategic Command, Russia’s Phobos-Grunt (grunt is Russian for “ground” or “soil”) probe, which was to land on Mars’s moon Phobos, will re-enter our atmosphere between January 14 and January 17. It’s currently stuck in a decaying Earth orbit – falling from a perigee (low point) of 130 miles ASL to 114 miles now – the 29,100-pound spacecraft, stuffed with 8.3 tons of hydrazine fuel, will likely come down around January 15, the Russian Defense Ministry agreed. It was lifted into Earth orbit November 8 from Kazakhstan, but the kick-motor intended to send Phobos-Grunt on its eight-month journey to Mars failed to fire. NASA and the European Space Agency have been feverously trying to help the Russians re-establish communications with the spacecraft[1].

Phobos-Grunt could impact anywhere from 51.4° north latitude (about as far north as London), to 51.4° south latitude (nearly as far south as the tip of South America). On the upside, the toxic hydrazine rocket fuel is carried in aluminum tanks, which will easily melt during re-entry, allowing the fuel to burn-off very high in the atmosphere, posing no problem for those on the ground.

Russia’s space program, according to Michael Listner, a space law attorney and writer for The Space Review, “is way too ambitious, and way too underfunded, to reach its goal. Adding the Chinese orbiter late seems to have pushed the risk to [this] mission very, very high.” The $163-million spacecraft carried a piggybacked Chinese Mars orbiter, added late during the mission preparation, and a Planetary Society microbe experiment.

Phobos-Grunt joins a couple of other large spacecraft that have fallen in recent months. NASA’s UARS satellite landed in the Pacific Ocean in September, and Germany’s ROSAT plunged into the Bay of Bengal in October.

The troubling aspect of this incident is that Russia is now having problems with both lift vehicles and payloads, which bodes ill for our voluntarily making ourselves dependent on their space program to maintain our own.

[1] See Dan Vergano, Russia’s Phobos-Grunt probe heads for fiery finale, in USA Today, January 7 2012.

the Hawkeye Circus, er, Caucus

Eagle Watch — Thu, 05 Jan 2012 14:58:00 GMT

The first “First in the Nation” is now behind us, and all those left standing are now working the second “First in the Nation.”

Iowa has played its traditional role of showing the candidates in flannel shirts and coveralls, sitting in diners with small-town folks, talking about crops, hogs, and this year, economics. In the end, Mitt Romney (13 delegates) pulled out an eight-vote win over Rick Santorum (12 delegates), leaving Ron Paul and Newt Gingrich to explain their performance in the arcane caucus process. All others are done, whether they admit it (or know it) or not.

Mitt Romney is still exhibiting his ~25% ceiling (he’ll do better in New Hampshire because he has ties to that state), but Mr Romney’s floor of support and his ceiling are practically indistinguishable. In Iowa, he polled the same this time around as he did in 2008, and that tracks with his national numbers. As the field narrows, his numbers will grow, and I still think he will get the nomination. That will give the GOP “enthusiasm” problems in November, but for once, neither party will enjoy an enthusiasm gap.

Rick Santorum’s Iowa showing is a product of his peaking when the music stopped. He has a good, fundamentally sound conservative record and message, but not an innovative or exciting one. He’ll do well in fund-raising (he got a million dollars yesterday!), and that will carry him through New Hampshire and into South Carolina. How he does there will determine a lot about how much further he goes.

Ron Paul had his best showing ever this year, and that could prove a boon to Democrats. Since Dr Paul isn’t seeking re-election to the House, he could be deluded into thinking a third-party run at the presidency would be justified. This will also be a GOP problem with Donald Trump’s ego until the convention is over. Dr Paul’s Iowa showing helps Mr Romney, keeping the Not-Romney vote splintered going into New Hampshire, which will insure his momentum going into South Carolina. Paul has a national polling of ~3%, which could get as high as 6% this cycle, but that’s only enough to guarantee an Obama victory.

Newt Gingrich now has to balance all his baskets on South Carolina’s egg. He needs to win it. If he can even the playing field a bit, he will do well in Florida, but Romney will hit South Carolina two-for-two, and Gingrich must stop the surge there. To do that, he must neutralize Santorum in New Hampshire (read: finish ahead of him) and win South Carolina.

Michele Bachmann has already announced her withdrawal, and Rick Perry and Jon Huntsman are only lacking the announcement. Huntsman will do reasonably well in New Hampshire (he’s been working it like the others did in Iowa), but has little appeal or backing beyond the Granite State. He’s too much of an insider to appeal to South Carolina’s Republicans, and nothing to show Florida. Perry could stage a comeback in Florida (another southern state), but it would be too late.

Iowa still provided its traditional “three tickets out of the state” – Romney, Santorum and Gingrich – with Paul’s people’s usual acumen for working caucuses. But Newt Gingrich has to stop being the Howard Stern of the race, return to his positive message and hope the networks will continue to pummel us with “debates.”

Official Iowa results show Mitt Romney with 30,015 votes (24.557%); Rick Santorum with 30,007 (24.551%); Ron Paul with 26,219 (21.452%); Newt Gingrich with 16,251 (13.296%); Rick Perry with 12,604 (10.312%); Michele Bachmann with 6,073 (4.969%); Jon Huntsman with 745 (0.61%); No Preference with 135 (0.11%); Other with 117 (0.096%); Herman Cain with 58 (0.047%).

the Vision Thing

Eagle Watch — Thu, 22 Dec 2011 10:46:00 GMT

We’ve heard much about various politicians’ “Vision of America” – come next November, we’ll find out what the voters see.

First, let’s dispense with the discussion about whether or not this election will be a referendum on President Obama. All presidential elections (and not a few off-year ones) are referenda on the sitting president. If voters think he’s doing a good job, he’ll be re-elected (or supported); if not, he won’t. It’s not rocket science.

President Obama will try to make the election about the Republican candidate – whoever gets the nomination will be the devil incarnate – rather than his record, which is tainted by the legacy of his absentee-landlordship over a dysfunctional Democratic Congress’s spending like drunken Greeks. The Republican will try to make the election about that record. The undercurrent of this cycle will be about government’s role in American society.

This is a national argument that we’ve had since the Founding, albeit taking different masks at different times. Both conservatives and liberals favor a strong national government – the conservatives for presenting a dependable national face to the world, and the liberals for the sculpting of domestic society. It’s Hamilton versus Jefferson.

The problem with highly polarized eras is that this becomes an either/or question rather than one of where to strike the balance. Obviously, government has a place in shaping society – law enforcement, poverty relief, and so on – and equally obviously, government has a responsibility to protect its territory, citizenry and interests. Unfortunately, the 2012 elections will be portrayed as the evil, child-eating Republicans against the oblivious, frenzy-spending Democrats, when the real question is whether we want a nation that trusts its people or one that trusts its politicians.

The idea of market-republicanism is that the people, in the aggregate, make better decisions – the averaging of 300 million self-interested individuals tends to be more solution-oriented than the averaging of 535 self-interested politicians. Politicians, of course, tend to disagree. Both Democrats and Republicans favor increasing their personal power and, taken times 535 means larger government – for no higher purpose than cumulative self-aggrandizement.

That would be annoying enough except the consequences are more important than just that. More government means less left over for investment in problem-solving and wealth-creation, which is what raises standards of living for everyone. Government doesn’t make anything, so whatever it gives to someone, it must first take from someone else. Government doesn’t create wealth, it consumes it. Government is hopelessly inefficient at actually doing anything – it’s a deliberative body, not a particularly good administrative one.

A large part of the problem is that Congress isn’t about solving problems, it’s about how best to use problems to advance an existing agenda. Both parties do this. Individuals tend to solve the actual problem at hand. I don’t know how anyone can look at the current condition of America at home and abroad, and conclude that incumbents deserve to have their power increased.

Of all the monies collected to help the poor, 70% is absorbed by the numerous bureaucracies set up to “help the poor.” By far the biggest beneficiaries of such funds are the middle-class bureaucrats assigned to administer those funds.

Iran’s New Toy

Eagle Watch — Tue, 13 Dec 2011 11:08:00 GMT

An hour after Iranian state television aired images purporting to show off a captured LockheedMartin RQ-170 Sentinel, General Norton Schwartz, the Air Force’s top uniformed officer, raised the specter of a foreign power copying the stealthy jet’s top-secret technology.

The RQ-170 is a flying wing UAV containing many features familiar to those conversant in stealth design – e.g., notched landing gear doors, sharp leading edges and a curved wing planform – has a 43-foot wingspan and is powered by a General Electric TF34 non-afterburning turbofan. A streamlined blister atop each wing carries datalink communications gear, and a ventral streamlined blister along the centerline contains sensors. The New York Times has reported that the Sentinel, in addition to its imaging equipment, is “almost certainly” equipped with communications intercept equipment as well as highly sensitive sensors capable of detecting very small amounts of radioactive isotopes and chemicals (gas chromatograph on a chip) which may indicate the existence of nuclear weapons facilities. The RQ-170 is also known to carry an excellent synthetic-aperture side-looking radar, used for detailed mapping.

The available reports don’t shed much light on how the Iranians came into possession of the drone. At first, they claim to have shot it down, then they said that they hacked the system and redirected it to land in Iran. Both are highly unlikely. The chronology suggests a glitch – probably software – that resulted in an “undefined” situation (as far as the operating system was concerned).

US military officials in Afghanistan announced that they had lost contact with a UAV operating over western Afghanistan. The next day, Iran claimed that they had shot down an “American spy drone” and had the wreckage. The New York Times reported that the missing drone was an RQ-170, a sophisticated stealth platform with advanced sensors. Iran then said that they had hacked into the UAV’s operating system and redirected it to land in eastern Iran. And then they showed what appeared to be an in-tact RQ-170 on state-run television. The airframe showed light damage consistent with a wheels-up landing.

A couple of things of interest here: the Sentinel is programmed to, upon losing contact with its controller, re-trace its flight path and land itself at the airstrip where it began its journey. So a controlled descent and landing is within the platform’s capabilities. The operating system and associated software is double-encrypted, and would be very difficult for anyone without specific decryption algorithms to “redirect” a Sentinel to an alternative landing site. The RQ-170 communicates with its controller via line-of-sight SATCOM datalink network, again, extremely difficult to breach. Dan Goure, an analyst at the Lexington Institute [Arlington VA], noted that engine or navigational malfunction could be ruled out because of the in-tact nature of the sample shown on Iranian TV.

I think an unforeseen set of circumstances caused the Sentinel to deviate from its “return and recover” routine, and sent it looking for a flat place to land. Subsequently, the Iranians found the platform (it would have been noticeable during its descent and approach) sitting where it landed and shut down. The light damage a result of an unimproved landing site.

I’m not that worried about any stealth technology that could be compromised by examining the aircraft – the materials, coatings and architecture of minimal radar-cross-section design are in the public domain – but I am concerned about what sensors are on-board and what condition they’re in. Chinese and Russian engineers are en route to examine the Sentinel.

President Obama requested that Iran return the UAV, but that request has been rejected. My thought was they might take a page out of our book: Major Viktor Belenko, a Soviet MiG-25 pilot, defected to the West by flying his Foxbat into Japan in 1976. The Kremlin insisted that we give their MiG back, which CIA did in a series of crates and boxes after the aircraft was completely dissembled and examined. The Chinese will try to buy the RQ-170 in-tact, which cash-strapped Iran may well permit. This would be the worst-case scenario, from our standpoint.

Among PRC, Russia and Iran – our chief geopolitical adversaries – PRC can get the most value from this artifact. They have the assets and talent to decrypt the operating system (thus learning much about how we automate the flight regime of our UAVs); they can move ahead of Russian stealth methodology by studying the internal construction and materials of the Sentinel; the Chinese covet our miniaturized synthetic-aperture radars (if one was on-board this RQ-170), and the firmware of how we integrate the various sensors into meaningful data packets. And PRC can afford to develop a platform based on a reversed engineered Sentinel, which would tax the Russian defense budget, and is utterly beyond Iranian resources, capabilities and talent.

However this incident ends, it’s not the end of the world – even though the F-117’s technology is now in the public domain, it remains virtually invisible to air defense radars – but it is a set-back. We loose an advantage we have enjoyed for several years, as the rest of the world moves closer to our state-of-the-art in operational low-observable technologies, and that ratchets up the risk for any given stealth mission while proliferating the ability for stealth being used against us.

See Dave Majumdar, Iran’s captured RQ-170: How bad is the damage?, in Air Force Times, December 9 2011.

Scott Shane and David E Sanger,"Drone Crash in Iran Reveals Secret US Surveillance Effort, in The New York Times, December 7 2011.

The mathematics of radar evasion are widely known, and much was learned by our adversaries from the F-117A Nighthawk shot down over Serbia during our aerial campaign during the Bosnian war.

We have since acquired three examples of MiG-25s which are operated by the Air Force’s “Aggressor Wing” at Nellis AFB [NV].

Which, of course, means that our encryption/decryption algorithms are now compromised and must be ground-up re-written.

Pyrrhic Victory?

Eagle Watch — Sun, 20 Nov 2011 14:30:47 GMT

King Pyrrhus of Epirus defeated the Romans at Heraclea (280BC) and at Asculum (279BC), but at the cost of irreplaceable casualties to his own forces. Upon being congratulated by a cohort, the King replied, “one more such victory would utterly undo me[1].”

I get an inkling of King Pyrrus’s lament as I consider Democrats’ reaction to Judge Laurence Silberman’s (a Reagan appointee) majority opinion of the US Court of Appeals for the DC Circuit in affirming the individual mandate provision of the Affordable Care Act. Democrats are, of course, gloating over a conservative judge’s agreement with the liberal dream of establishing a nationalized healthcare system. They apparently read the verdict but not the opinion itself.

Does Congress’ enumerated power to regulate interstate commerce empower it to compel individuals, as a condition of living in America, to engage in a commercial activity? If any inactivity can be said to have economic consequences, can it be required by Congress? Can Congress forbid the inactivity of not purchasing a product from a private provider? Judge Silberman say yes: “We acknowledge some discomfort with the government’s failure to advance any clear doctrinal principles limiting Congressional mandates that any American purchase any product or service in interstate commerce. But to tell the truth, those limits are not apparent to us, either because the power to require the entry into commerce is symmetrical with the power to prohibit or condition commercial behavior, or because we have not yet perceived a qualitative limitation. That difficulty is troubling, but not fatal, not least because we are interpreting the scope of a long-established constitutional power, not recognizing a new constitutional right.”

I have a problem with that logic that I believe the Supreme Court may share.

Judge Brett Kavanaugh, dissenting on the DC Circuit Court, dryly praised Silberman’s “candor” in “admitting that there is no real limiting principle” to the Commerce Clause jurisprudence embraced by the court’s majority. He emphasizes the asymmetry between, on the one hand, regulating or prohibiting commercial activity and, on the other hand, compelling such activity[2].

Here’s something for liberals to consider: limitless Congressional power means that a Republican one-party rule could constitutionally command the replacing of Social Security with mandatory private retirement accounts (going a long way toward balancing the federal budget), or order states and communities to allow any and all religious displays on any and all public lands (neither favoring nor discriminating against any over others). Judge Kavanaugh rejects Silberman’s attempt “to mitigate the dramatic implications of its no-limiting-principle holding” by noting that “Congress is subject to a political check.” This abdication of judicial duty totally ignores the fact of how the Affordable Care Act came to be – rammed through a Congress devoid of the possibility of a political check, having legislative majorities in both Houses and a compliant president, and in the face of a virulent public rejection. There still exists a majority opinion that the law needs to be repealed.

If this demonstrably impotent “political check” were all that was necessary to protect the public from Congress, there would be no need of a Supreme Court. I think the Justices will recognize the danger hidden from Judge Silberman, and begin to end the New Deal era of the High Court.

[1] Plutarch, Pyrrhus, John Dryden (trans).

[2] See George F Will, No Government Limits Results in No Liberty, in Washington Post, November 20 2011, p. A16.

Mandate, Severability and Standing

Eagle Watch — Tue, 15 Nov 2011 18:10:00 GMT

The Supreme Court has agreed to combine three cases (National Federation of Independent Business v Sebelius, No 11-393; US Department of Health and Human Services v Florida, No 11-398; and Florida v Department of Health and Human Services, No 11-400) to review for ruling on the legal legitimacy of the Patient Protection and Affordable Care Act.

The three issues the Justices feel in need of clarification include the primary question of whether Congress overreached its authority in mandating that, just by being alive, one must purchase health insurance. Also included are the issues of severability (if the mandate is struck down, can the rest of the law be valid?) and standing (can any challenge be brought before the bar before they are in effect – i.e., before there are actual victims of the law). Oral arguments have been slated for March, and an unprecedented 5½ hours have been set aside to hear them. In the normal course of events, a ruling could be expected in June or July, probably after a Republican nominee has been virtually anointed.

Paul Heldman, senior analyst at Potomac Research Group, which provides Washington policy research for the investment community, said he still leaned toward the view that the law’s requirement that individuals buy insurance will be upheld. “We continue to have a high level of conviction that the Supreme Court will leave much of the health reform law standing, even if finds unconstitutional the requirement that individuals buy coverage,” he wrote in a recent note. I would like to see that entire note, because while I agree with him on the severability question (SCOTUS will likely leave in tact any parts of ObamaCare not overturned), but, as an advisory to investors, should have included something about the economic unfeasibility of the Act in the absence of universal participation – the mandate accounts for fully half of the admitted cost of the bill (which will undoubtedly not be close to the actual cost. Laws always cost more than their authors admit). As a legal matter, the Court may well infer severability, but as a practical matter, it cannot survive without its major funding mechanism.

The administration has pointed to other landmark laws, such as the Social Security Act, the Civil Rights Act and the Voting Rights Act, all of which enjoy a degree of universality and all of which have survived similar legal challenges. Of these, two rest on precursor acts (Social Security Act – working, and Voting Rights Act – voting), leaving the Civil Rights Act as the most congruent to the question of the mandate – one’s involuntary and irreversible ethnicity is transparent to the applicability of the Equal Protection Clause of the Constitution. It’s black letter law. The mandate is only ambiguously addressed by the Commerce Clause, and the questions raised involve a wider concern regarding the resulting freeing Congress of any limitations whatsoever.

“Let’s go right to what is your most difficult problem,” Judge Laurence H Silberman told a lawyer at an argument in September before the US Court of Appeals for the DC Circuit. “What limiting principle do you articulate? If Congress may require people to purchase health insurance, he asked, what else can it force them to buy? Where do you draw the line? Would it be unconstitutional to require people to buy broccoli?”

“No,” said the lawyer, Beth S Brinkmann. “It depends.”

"Could people making more than $500,000 be required to buy cars from General Motors to keep it in business?"

“I would have to know much more about the empirical findings,” she replied.

Thus is the arrogance of government in assuming that its agenda is more important than the petty concerns of its people or the requirements of law. This applies to government generally, regardless of which party occupies the White House.

Whether anyone has standing to challenge an aspect of law that has no actual victims is an interesting one. Like most issues swirling around the Affordable Care Act, there is a degree of ambiguity around this one, too.

It is Court tradition (but not a matter of law) not to grant certiorari to issues not yet in play – they deny standing to complainants who have not actually been harmed by the law they protest. The complication is one of severability, as parts of the law are already in effect, and if there is no severability and some aspect is, in fact unconstitutional, then the whole law – including that which is already in force – is unconstitutional.

The questions in play here have nothing to do with healthcare. Just as in case law, where the trial is about the behavior of plaintiff and accused, and the appeal is about the behavior of the lawyers and the judge, at the Supreme Court level, the case is about the behavior of government. This is that over which the Supreme Court has authority.

See James Vicini, Supreme Court to take on Obama healthcare law, Reuters, November 14 2011.

See Adam Liptak, Health Law Puts Focus on Limits of Federal Power, in New York Times, November 14 2011, p. A1.

a Civilizational Crisis

Eagle Watch — Tue, 08 Nov 2011 15:38:00 GMT

The fall of the Soviet Union, geopolitically profound as it was, didn’t usher in “a New World Order.” The world still lives in the warmth and prosperity of the dominance of Western Civilization. A collapse of the European Union could well end that world order – which is on notice of a challenge by a Sino-centric power center in any event. But the failure of the eurozone could hasten the challenge and wage it on Beijing’s, not our, terms.

The transatlantic axis, anchored by a prosperous Europe and America, represents a philosophically consistent worldview (Judeo-Christian Greco-Romanism) that has largely driven history for the better part of the last two millennia. The Age of Empire crumbled in the aftermath of World War I; The Second World War brought Japan into the Western fold, and the reinstatement of Israel established a Western outpost in the Muslim Middle East; President Nixon began a process (still underway) to entice a Maoist China in the direction of market republicanism; the collapse of Europe’s last great empire – the Soviet Union – brought about an opportunity to reorient Moscow toward a Western worldview. These last two are works-in-progress that are trending poorly.

The imperial intensions of the Soviet Union were exposed immediately post-World War II, and the Untied States countered by forming NATO to geographically encircle Eurasian Russia, and the Marshall Plan to economically isolate it. “Containment,” we called it. Military competition between us and the Soviets led to the space programs of each, which led to exponential expansion of the ability of each to inflict violence on the other. “Deterrence,” we called it. Containment and deterrence held Soviet expansionism in check until the revelation of stealth technology and our undertaking the design and construction of a ballistic missile shield rendered the Soviet Union economically irrelevant.

It’s ironic that governance failures in Greece and Italy may sink the predominance of Greco-Roman-based Western Civilization. It’s more likely than probable, and more potential then likely, but it could happen; and if a tipping point is reached, our “friends” in Beijing and Moscow will help push us over the edge. An evening of the global balance of power is in PRC’s and Russia’s best interests, and I would expect nothing less from them.

The problem isn’t Greek and Italian prolificacy as much as the false promise of European economic homogenization. It was never possible, awaiting only the first time is was actually needed to illuminate the fraud. Many commentators point to Ireland as the index-case, saying that the euro delivered on its promise – Ireland was bailed-out and has (thus far) repented and is sinning no more. That’s correct, but Ireland isn’t the disease, only the first symptom. The disease is the social-democratic model of European political economics. It just doesn’t work, and the eurozone remedies for assisting individual countries isn’t up to rescuing the ill-designed system upon which the eurozone is based. A failure of the eurozone could bring down the European Union, likewise based upon a myth – that of Europe’s people being more comfortable being citizens of Europe than being citizens of Germany, or France, or Poland, etc. A collapse of the Union in the midst of a surge in nationalist sentiments and economic impotence would provide a feeding frenzy for Moscow and a further economic isolation of the Untied States.

This would not be a collapse of the Old World Order, but it could well begin an irresistible shift in that direction, culminating in a Beijing-centric (or, less likely, a Beijing/Moscow-centric) New World Order in a generation or two.

What that would mean for the rest of the world depends on whether Beijing perceives it in their interest to maintain free world trade, or seeks to dominate world trade for short-term, parochial gain only. Much would depend on whether Beijing sees rabid Islamism as threat to civilization, or suppresses only Uyghur and Tibetan insurrections. Just as Hawaii is a strategic lynchpin in America’s ability to dominate the Pacific, it presents a strategic obstacle for anyone else’s dominance of it – how will a Chinese superpower handle the Hawaiian irritant?

All of this, of course, assumes continued Chinese economic progress, which is in no way a certainty. They are having their very own real estate bubble, but theirs is happening inside a larger, more dangerous currency bubble. Neither is sustainable, and how Beijing handles them will be outcome-relevant to what happens in the wake of Europe’s struggle to restructure itself on the fly.

If Greece fails, or is excommunicated from the euro, the euro will probably collapse as a serious world currency. That would initiate serious self-doubts among members of the European Union, a failure of which would dissolve Europe into Germany, England, the probable loss of much of Eastern Europe into the Russian shadow, and near-Third World conditions in southern Europe. Europe, as a player, would be off the table for at least a couple of generations.

Eat the Rich!

Eagle Watch — Tue, 01 Nov 2011 12:15:17 GMT

That’s this year’s HopeyChange message from Team Obama.

Those Wall Street fat cats, corporate jet owners and oil tycoons have crashed the economy, and they did it by stealing everybody else’s hard-earned home equity and 401(k) values. That’s what our post-partisan, the-only-adult-in-the-room, let’s-lower-the-rhetorical-heat president’s team is telling people these days.

Other points of interest in this year’s Silly Season:

This may be the first presidential campaign where both parties run on a “do-nothing Congress” message – Democrats against an “obstructionist” Congress, Republicans favoring a “stop-the-bleeding” one.

President Obama tells Jay Leno that he’s waiting “til they’re all voted off the island” before paying attention to the GOP debates – although we can rest assured that his Pre-Primary Debates Czar is paying riveted attention to them because the White House always has detailed criticism of the candidates’ comments the day after each one.

There are three interesting things happening in the Republican field – Romney’s static numbers, Cain’s durability, and Gingrich’s slow, steady climb.

· Mitt Romney has held between 20 and 25% since announcing, regardless of how the other contenders are doing. In other words, he’s neither losing nor gaining support to or from the fortunes of his competitors. That’s interesting because normally one candidate’s slip in the polls is absorbed by the favorite’s campaign, but not this time. Mr Romney’s poll numbers seem independent of how the other candidates are doing.

· Herman Cain’s meteoric rise matched that of Michele Bachmann’s and Rick Perry’s. But the latter two both quickly swooned, and Mr Cain has not. Mr Perry’s rapid rise appears to have been at the expense of Ms Bachmann, whose numbers declined in concert with his announcement and spike in the polls. Mr Perry’s disastrous (and Mr Cain’s strong) performances in the debates seems to have transferred Mr Perry’s numbers to Mr Cain’s column. Where they have stayed. Mr Cain is, in fact, mounting a slow gain on Mr Romney’s steady fifth of Republican primary voters.

· Newt Gingrich who, if the debates were actually scored like debates, has won them all. His numbers are steadily inching upward with each performance.

As an old analyst of political polls, I would make the following observations. Romney’s plateau suggests to me that there is strong sentiment among professional Republicans that he is “electable” – that he can beat President Obama. But there is no enthusiasm. Romney is a known quantity (he has been running for this office for five or six years now), and he’s a moderate with few discernable conservative principles. They like him but they don’t love him. He will get the nomination (and their backing) if he’s the last man standing.

Mr Cain’s longevity as “flavor of the day” has two dynamics – no new candidates since his rise; and, he can hang in there at least until the first caucuses/primaries – debates are cheap; retail campaigns are expensive. Mr Cain is a little out of left field and unconventional for the Republican establishment, and they aren’t going to throw their weight behind him until they’re sure he’s more than a curiosity. He’s going to have to win a couple of caucuses and primaries on his own before the establishment (and their bundlers) show open support. Beyond, say, Florida, steady infusions of money could be fatally lacking for Mr Cain if he hasn’t persuaded the establishment to support him by then.

Everybody knows the problems we face, Newt Gingrich knows the solutions that will probably pass Congress. He knows this because he has spent the last eight years formulating solutions and polling likely voters of both parties to find which enjoy majority support. He is not telegenic, and he has baggage from his days as Speaker of the House, but his debate performances have been flawless – he knows what will sell, and in most cases, he’s the only one selling – the rest are using playbooks largely prepared by “experts” (like economists who missed the coming of the Great Recession).

What we have, I think, is separation of the moderate (Romney), pragmatic (Gingrich) and conservative (BachmannàPerryàCain) wings of the party, and it will probably stay pretty much like this until the primaries begin sorting out winners and losers. If Cain falters, it will become a short, asymmetrical contest between Romney and Gingrich – asymmetrical because the establishment money will go with Romney in that case.

Although I think there have been (and will be) too many of these “debates,” there is no doubt that they have driven the Republican race so far. As long as we are devoting so much TV time to the candidates, I would rather see each given a show to lay out their plan and vision for America, after which two journalists, one liberal and one conservative, would ask questions restricted to the material raised during the candidate’s speech (no outside matters allowed). I think we would learn more about the people seeking high office.

ObamaCare SCOTUS Update

Eagle Watch — Tue, 25 Oct 2011 15:13:14 GMT

The hatful of lawsuits challenging ObamaCare are likely to be heard before the Supreme Court of the United States during this session. All of the cases ask the Court to rule on whether the Commerce Clause of the Constitution allows Congress only to regulate commerce that is being committed, or if Congress can command commerce to be committed – the individual mandate question. US District Courts of Appeal have ruled both ways on this, so the Supreme Court is almost certain to grant certiorari on this aspect of ObamaCare.

This vital to the whole of ObamaCare, since without the individual mandate, forcing insurers to underwrite pre-existing conditions and removing caps on lifetime care will bankrupt the industry. Put simply, if the mandates can’t be enforced, the whole healthcare overhaul collapses.

There are also wider implications, because if Congress can construe the oversight of on-going commerce to include a mandate that every American commit commerce, there is no limit to what Congress can mandate. This is precisely the check on government power the Supreme Court was designed to perform. The 11^th Circuit Court of Appeals found the individual mandate “breathtaking in its expansive scope … The government’s position amounts to an argument that the mere fact of an individual’s existence substantially affects interstate commerce, and therefore Congress may regulate them at every point in their life. This theory affords no limiting principles in which to confine Congress’s enumerated power.”

The National Federation of Independent Businesses, and other litigants argue that if the mandate is struck down, the entire Affordable Care Act is invalid. One of the examples of the slap-dash nature of the way in which this law was “crafted” is the absence of a severance clause – a boilerplate of legislative language that all bills include which states that “if any portion of this law is overturned or repealed, the remainder remains in full force and effect.” No such clause was included anywhere in the 2,000+ pages of ObamaCare, meaning that invalidating any of it invalidates all of it. The Supreme Court may well overlook this case of stare decisis in order to avoid chaos in Congress – or it may hold to tradition (and settled law). This could go either way, even with a 5-4 rejection of the mandate (which is not assured in any event).

An inside-baseball aspect is the 4^th Circuit’s ruling that it lacked jurisdiction because the Anti-Injunction Act prevents anyone standing to challenge a tax before actually paying (referring to the penalty for not buying health insurance, which is not yet in-force). Both Liberty University and the Solicitor General are asking the Court to rule on this, but both are asking the Court to find that the AIA doesn’t apply in this case. Neither wants the “penalty” to be considered a tax – Liberty Union because Congress has the enumerated right to levy taxes, and the government because the Democrats proclaimed loudly and often that this was in no way a tax.

The Court will undoubtedly discuss this aspect, but could take one of three courses: it could rule that AIA doesn’t apply here, moving on to the greater challenges of the mandate; it could find that AIA does, in fact, apply, telling Liberty Union to come back after 2014 (when the penalty will be in force); or, it could choose not to hear this case at all.

Then there’s the Virginia Law. Just before President Obama signed the Affordable Care Act, Virginia passed a law making it illegal for anyone to require a Virginia resident to buy insurance. The state is arguing this case as a state’s rights issue. The Court will likely not review this aspect, since, once a Virginian refuses to buy insurance under ObamaCare (in 2014), the case will get thrown out in pre-trial motions as the US attorney will invoke the superiority of federal law over state law in cases of conflict between the two.

The group of 26 states is, in addition to challenging the mandate, is asking the Court to invalidate ObamaCare’s expansion of Medicaid to all non-Medicare recipients at or below 133% of the federal poverty level (it is currently 100%), or leave Medicaid, as commandeering the states to enforce federal law at the states’ expense. This may not be heard, or forthrightly upheld – states have unsuccessfully tried to challenge various aspects of Medicaid in the past.

The 26 states are joined by Liberty University in asking the Court to throw out the Employer Mandate, which requires businesses with more than 50 full-time workers to provide health coverage or pay a fine. Litigants say this interferes with the employer-employee relationship, which is private and a contractual arrangement. There is precedent for the Court regulating this relationship, and they are unlikely to address this issue except in passing.

Right now, I’m guessing that SCOTUS will strike down the individual mandate as extraconstitutional; will not rule on the severance issue (thereby allowing the rest of ObamaCare to legally stand, if without half of its funding); will dismiss (in the opinion, if not in an actual ruling) the Virginia law; will uphold the Medicaid provision and will not address the employer mandate. That’s my call before hearing the oral arguments.

Time to put the Hard Hat on Again

Eagle Watch — Tue, 18 Oct 2011 09:25:36 GMT

According to NASA, another satellite will re-enter the Earth’s atmosphere next week. This time, it’s the 2.4 ton defunct German Aerospace Center X-ray telescope ROSAT[1]. It will contact the atmosphere sometime between October 21 and October 23, and probably won’t complete an entire orbit before impacting the Earth’s surface.

Like last month’s UARS satellite-plunge, ROSAT will break-up in the upper atmosphere and, largely, burn up as it passes through, although pieces as heavy as ~400 kilograms (~880 pounds) could survive to impact the surface.

ROSAT was lifted into orbit on 1 June 1990 aboard a Delta II Heavy Lift Vehicle for an 18-month mission to map X-Ray sources in the cosmos. In fact, it operated successfully until 12 February 1999, when it finally went dark and quiet. During that span, ROSAT mapped 110,000 stars, supernovae and X-Ray sources. Unlike satellites taken up by the Shuttle, ROSAT has no “kick motor”, a relatively weak rocket to take it from the Shuttle’s parking orbit to its higher, working orbit. The Delta lifted it directly to its working orbit. The fuel for ROSAT’s maneuvering reaction thrusters is spent. All this means that there is no way to stage its re-entry to put impact where we want it – it will come down where it comes down.

The German Aerospace Center puts the odds of its falling satellite’s parts hurting anyone on the planet at 1 in 2,000. But the odds of a specific person being hit by debris – say, you – are much higher, ~1 in 14 trillion. You’re odds are better for winning the lottery by buying one ticket one time.

So put your hard hat back on, and if you’re hit by ROSAT debris, buy that lottery ticket!

[1] ROSAT is short for Röentgensatellit, in German X-rays are called Röentgenstrahlen, in honor of their discoverer, Wilhelm Röentgen.

If Things Come in Threes …

Eagle Watch — Thu, 13 Oct 2011 15:19:24 GMT

You’ve heard it all your life … “good/bad things come in threes.” If that’s true, we could be in for a rough winter. There are, in fact, three situations coming to a head – the Eurozone financial crisis, a wholly new aspect to the Egyptian Spring, and a wholly new aspect to Iranian bellicosity. All three could have very serious impact on America, but if they produce at roughly the same time, they surely will.

Europe may no longer be able to save itself. Too many countries have too much debt. Its economic growth – which enables countries service their debts – is too feeble. And nervous financial markets seem increasingly prone to dump the bonds of vulnerable countries (leaving some of Europe’s largest banks holding the bag). This is the real risk to the global and US economic recoveries, far overshadowing Standard & Poor’s downgrade of US Treasury debt and general market volatility[1].

The internals of the European crisis are purely European: the two most likely solutions – the resurrection of the “German Problem,” and excommunicating Greece from the euro would collapse confidence in the currency and the Union that backs it. That having been said, the effects of failing to subdue the crisis will have repercussions well beyond Europe. The failures of large European banks (the French/Belgian Dexia Bank has already been taken over and broken up) will spill over into banks outside Europe, as the world’s large banks are intertwined through loans to each other and the exchange of securities. A failure of confidence in European banks would quickly lead to a crisis of confidence in Western banks. Investors begin pulling funds out of investments held by these institutions, banks stop lending to each other, and credit freezes again. This time, worldwide.

The cost of shoring up Europe in the medium term would take ~€2 trillion (~$2¾ trillion)[2]. Despite the fact that the cost to the globe of a European financial collapse would vastly outstrip this amount, interested parties from the IMF to the Chinese and even the Europeans themselves have not been able to materially abate the crisis. The reason is simple. All solutions to date have attempted to shuttle funds from healthier balance sheets onto the balance sheets of bankrupt lenders and countries on the verge of default. While this is was the promise of a common currency – a “one for all and all for one” sort of monetary collaboration – it was based on fiscal and political assumptions that were non-existent and unlikely to materialize. Cobbling together enough hard capital to tamp down this crisis will almost certainly prove politically and economically impossible.

A European failure will cost the Dow at least a third of its value, which will quell any thoughts of an American recovery.

Second, October 9 was the most violent day in Egypt since the fall of Mubarak and many Egyptians are now calling it “Black Sunday.” What began as a Coptic protest march from Northern Cairo to the state TV building (known as Maspero) devolved into a melee that led to the deaths of more than 20 people. Multiple military vehicles were set on fire, military issue armored personnel carriers were driven through crowds of people at high speeds and at some point someone from within the crowd fired upon a group of soldiers who were providing security outside of Maspero. This was the first time that any protester in Egypt has used a firearm against an Egyptian soldier since the demonstrations began in January, and marks a dramatic shift in tactics[3].

Like the Eurozone crisis, a lot of the back story here is peculiar to Egypt – the role of the military in Egyptian society, the relationship between the military and the Tahrir Square protesters, the role of, and questions about, the Muslim Brotherhood – but the uniqueness in this incident is the firing on soldiers from the crowd of demonstrators. It’s never happened before. To complicate matters, communication in and out of Cairo is sketchy at best, and the voracity of those reports is difficult to determine. One item heard from multiple sources, multiple times, is that it was not Coptic Christians who fired at Egyptian troops, but outside agitators (possibly foreign, possibly Muslim Brotherhood, possibly al Qaeda, possibly … you get the idea).

In doing assessments of countries, you’re consistently looking for tripwires that are crossed or anomalies which are outside the norm, and that has unfold here. The military has controlled Egypt since Colonel Nasser removed King Farouk in a 1956 coup, so if this is a new phase of the Egyptian Spring aimed at challenging the military, this may turn out to be a true revolution yet. That will almost assuredly turn out badly for Israel and the West, as whatever emerges will less interested in Egypt’s recent historical role of counterbalance in the region, and more interested in expressing a more fundamentalist face. The Muslim Brotherhood is going to try to coopt the movement – this was well known – but may find it easier if the military is compromised in the public’s eye.

A more Islamist Egypt will destabilize the region at a time when it can ill afford to lose stability, and will complete the circle of hostility around Israel, which could lead to a great deal of unpleasantness indeed.

And third, an elaborate Iranian-backed plot to assassinate the Saudi ambassador to the US, Adel Al-Jubeir, and to bomb Saudi and Israeli Embassies in Argentina and elsewhere, was disrupted by FBI and DEA agents, officials said Tuesday[4]. An Iranian-born American with dual citizenship, Manssor Arbabsiar, contacted who he thought was a representative of Los Zetas – the enforcement arm of the Juarez cartel – in a plot to assassinate the ambassador by bombing a Washington restaurant while he was there. In actuality, he had contacted an undercover operative of the DEA, and the plot was allowed to unfold until $50,000 was sent from Iran, cementing the deal, which would net the shooter $1.5 million upon completion of the hit. The controller was a high-ranking officer of the Quds force, a covert operations contingent of the Iranian Revolutionary Guard (military), and answers only to the ruling mullahs. Thus far, Iran has denied any connection with the man or the alleged plot.

This is significant for two reasons: it represents a direct Iranian strike on US soil; and, it sidesteps Hizbollah, their usual choice for such things, and was willing to deal with agents indigenous to the Americas[5]. This is a geometric, rather than incremental, increase in the intensity of Iranian foreign operations, and demonstrates a deepening sense of impunity regarding America’s political will to react to Iranian intransigence.

At best, Tehran just overreached and undertook a bridge too far by trying to assassinate a Saudi official in America (with indeterminate collateral damage); at worst, it was a dress rehearsal for placing and detonating a WMD in an American city. Either way, it speaks volumes as to the failure of American policy toward Iran, not begun by the Obama administration, but amplified by its belief that the regime had any taste for rapprochement with America or the West. Sanctions obviously aren’t working – this operation was attempted in the face of the full force of those currently in affect. Additional sanctions would seem to be repeating behavior, hoping for different results.

The puzzling aspect of this operation is why they would choose such an amateur to execute such a sensitive operation. Despite numerous trips to Iran, his abysmal tradecraft belies any training Quds force may have given him – and it they didn’t train him, why didn’t they? Why would Tehran agree to pay Los Zetas $1.5 million? There is no history of Iran working with drug cartels, except for operating and training in the Tri-Border. With Hizbollah assets in South America, why not use them? Remember, we have been in an unresolved state of war with Iran since the 1979 takeover of our embassy in Tehran, and before 9/11, Hizbollah killed more Americans than all other terrorist organizations combined.

Whether by miscalculation or as part of larger phenomenon, this escalation is a dangerous development in Iran’s behavior.

Taken separately, any of these situations presents serious considerations for an administration that seem ill-prepared for them; in rapid succession, they present foreign affairs crisis for the West, in general, and Washington, in particular.

[1] See Robert J Samuelson, The big danger is Europe, in Jewish World Review, August 9 2011.

[2] Spain, Italy, Portugal, Ireland (still) and even France, and their institutions, will need some sort of injection of funds.

[3] See Dispatch: A New Phase in Post-Mubarak Egypt, STRATFOR, October 10 2011, 1537EDT. The private intelligence organization is closely following this development in Cairo, and continues to send numerous dispatches daily.

[4] See Brian Bennett,US accuses Iran of plot to kill Saudi ambassador, in Los Angeles Times, October 11 2011.

[5] Even though Hizbollah has operatives at training camps in the Tri-Border Region, where Brazil, Uruguay and Argentina meet.

the Depth of the Ditch

Eagle Watch — Thu, 29 Sep 2011 15:42:30 GMT

If the Republicans “drove the country into a ditch,” President Obama shot across the road into another one. It helps to understand the landscape. Going into the 2000 presidential election, according to the Pew Research Center, 35% of voters self-identified themselves as Democrats, 31% as Republicans, and 34% as Independents. By the 2004 elections, 35% still identified themselves as Democrats, 33% as Republicans, and 32% as Independents. Just before the 2008 election, Democrats were up to 36%, Republicans down to 27%, and Independents led everybody with 37%[1]. The ditch was real. Republicans had picked up two points during Mr Bush’s first term, but lost six during his second.

Add to that, in 2000, Independents split evenly at 11% leaning toward Democrats and 11% leaning toward Republicans; in 2004 it was 12% leaning toward Democrats and 11% still leaning toward Republicans. For the 2008 elections, 15% of Independents leaned Democratic while only 10% were leaning toward Republicans. A 9% partisan gap coupled with a 5% gap among Independents. It was a precipitous drop in support.

Today the picture is strikingly different. 33.5% of likely voters identify themselves as Republicans, 33.5% as Independents, and 33.0% as Democrats[2]. During the month of August, the number of Independents grew from 32.1% to 33.5%, the highest level in seven years of tracking. While that number grew during the debt ceiling debate, the president’s party lost support, dropping from 34.8% to 33.0%, the lowest number in seven years of tracking. Overall, 45% of voters say they at least somewhat approve of the president’s job performance (22% Strongly Approve, 23% Somewhat Approve). 53% at least somewhat disapprove (42% Strongly Disapprove, 11% Somewhat Disapprove)[3]. Eleven percent fewer than self-declared Democrats don’t strongly support the job that President Obama is doing, while 10.5% over-and-above self-declared Republicans strongly disapprove of the job he’s doing. A majority of likely voters at least somewhat disapprove. The ditch is real.

The Obama bubble has popped.

His base will vote for him – they’ve got nowhere else to go. The Republican base will support whatever candidate emerges – they’ve got nowhere else to go. The problem for both sides is the level of enthusiasm. Normally, a light turnout will favor an incumbent, but not necessarily this time. Neither Democrats nor Republicans can just tread water until the election, both must find ways to enthuse their base and persuade Independents. And that’s tricky business. You can’t just rile up one base – to throw red meat to either is to energize the other as well. Independents are hard to artificially persuade – they tend to read events and evaluate results.

In just three years, Democrats have lost 2.5%, Independents have lost 3.5%, and Republicans have gained 6.5%. A statistically significant number of Democrats have become fence-sitters, and an even larger number of fence-sitters are now identifying with Republicans. That’s seismic.

President Obama finally has a record – 9% unemployment, flat GDP, a banana republic level of debt and endless projected deficits – but he can’t run on it. All he can do is somehow rally his base more than their base, and demonize his opposition. That may not work, depending on how the Republicans respond to their own funk.

For their part, the GOP is overlooking the “good” in search of the “perfect.” By all measure, Mitt Romney would beat President Obama if the election were held today, meaning that in all probability, he would in November 2012 as well – nothing Obama’s team is proposing is new or different, meaning that hiring will remain below replacement level, GDP growth will remain anemic, and, not having produced a budget yet again, nothing is going to cut deficits or debt between now and then[4].

Against this backdrop, Republicans are tilting at Reagan’s image, searching for another galvanizing conservative who can charm the press and public alike. They don’t need to. All they need is someone who comes across as sincere in his proposals, capable of running a huge bureaucracy, and has the gumption to stand up to demonization and a hostile press while being gracious about it all.

They’ve got one of those now.

[1] Statistics from: Fewer Voters Identify Themselves as Republicans, Pew Research Center for the People & the Press, March 20 2008. Pew Research polls registered voters.

[2] Partisan Trends, Rasmussen Reports, September 1 2011. Rasmussen polls likely voters.

[3] Daily Presidential Tracking Poll, Rasmussen Reports, September 27 2011.

[4] The SuperCommittee, not even reporting out until Thanksgiving, won’t have enough time to be effective before the next November, assuming the president uses their ideas, regardless of his history of ignoring “Blue Ribbon Panels” in the past.

Two Debates

Eagle Watch — Mon, 26 Sep 2011 14:12:00 GMT

There were two debates last week, one televised one not, both important on a national level.

Taking the televised one first, professional Republicans are, again, looking for a not-Romney candidate after Governor Perry’s lackluster performance Thursday night. It may be a case of style over substance, but no matter, Rick Perry is destined for second-tier status. The pundits are focused on his halting responses to a couple of questions, but mine was on his rather unfocused articulation of foreign affairs (when his response to a question about Israel wandered all over the place, never answering what should have been a rather easy question for a conservative).

No follow up was pressed, by either moderator or fellow candidates.

And then late Saturday, Herman Cain surprised everyone by winning the Florida straw poll going away. Not even close. Perry was a distant second, and Romney narrowly third, Michele Bachmann finished dead last (behind all the Hobbits and a former New Mexico governor no one has heard of, or even knew was in the race). I don’t put much stock in straw polls, but these results were unexpected, if not really important beyond the next one.

Rick Perry would be well advised to shift his aim from Romney to Obama. Begin a well-reasoned campaign emphasizing, specifically, what is wrong with the current administration’s approach to governing, and, specifically, what he would do differently. He needs a written economic plan that compares favorably to Mr Romney’s and a written foreign policy paper (which none of the candidates has yet produced). He needs to demonstrate why he is the best choice to replace President Obama in 2012, not why he might be “better” than Romney, or any of the Hobbits.

Michele Bachmann is on her way out. She needs to actually win the Iowa caucus to have any hope of being a player beyond Iowa – and restrain herself from saying anything stupid in the meantime.

Newt Gingrich is the smartest guy in the room, but isn’t willing to talk-down to voters (to imply his positions, rather than state them), but he has done extensive research on which issues resonate with voters, and which solutions are favored by majorities and pluralities of them. He also understands what will actually work, and what is possible to get through Congress. His problem is that, while he would have ample time and opportunity to communicate his ideas (and why they are better than Congress’s) directly to the people as president, he doesn’t really have that opportunity during the campaign. Too much “gotcha” by competitors and lack of insight by journalists.

Ron Paul is too extreme to be electable, Governor Huntsman too boring, and Rick Santorum too indistinguishable from the pack. I think there may be one or two others, but the fact that I can’t remember tells you all you need to know about their chances.

The other debate was the tentative agreement reached between General Motors and the United Auto Workers (contract talks between the UAW and Chrysler are ongoing, and Ford’s will start soon). First-year UAW President Bob King reached an agreement with GM’s Dan Akerson (also in his first contract negotiation) that actually allows both parties to realize some of their wishes. Part of the reason is the bailout’s no-strike mandate, removing the nuclear option from the UAW.

Basically, the union won the re-opening of GM’s Spring Hill [TN] plant and production guarantees at other plants that will mean 6,400 new jobs. Employees also get up to a $5,000 “signing bonus” for ratifying the contract agreement, and increased profit-sharing that could mean up to $25,000 for each worker over the four-year life of the contract.

In light of a signing bonus and increased profit-sharing, GM won the dropping of automatic COLAs for up to 40,000 current workers, and drop pay increases for higher-paid hourly workers, also totaling around 40,000. GM would offer skilled-trades workers, who earn the highest pay, $75,000 to leave the company. Veteran line workers, who earn roughly twice the pay of lower-wage workers, would get $10,000 to go. These offers apply to around 17,000 current senior workers at GM. Approximately 4% of the current hourly workers are paid the lower wage, which would rise to $19.28 an hour from between $14 and $16 an hour. Chris Cerasco, an analyst at Credit Suisse, estimated that every top-tier worker replaced by a lower-wage worker will save GM between $40,000 and $50,000 a year in wages and benefits.

Pre-new-contract, the Detroit Three are paying (wages and benefits) ~$49 an hour at Chrysler, $56 an hour at GM, and $58 at Ford. These figures are marginally competitive with non-union foreign plants operating in this country as long as quality holds up in the Big Three’s cars.

The significance of the GM deal is that it finally gives the union some skin in the game – it now matters whether or not GM is profitable – it’s a beginning toward putting employees and employers on the same team, and that’s organized labor’s only long-term hope of surviving globalization.

Damage Control

Eagle Watch — Tue, 06 Sep 2011 11:50:12 GMT

To get the economy back on track – once the recovery is self-sustaining – will take some sober thought, because as it is, the economy is set to self-destruct. The current norm is geared toward perpetual and ever-increasing deficit spending.

First, the capital markets have to be reinforced against a recurrence of 2008-09. Significant aspects of Glass-Steagall should be reinstated whereby investment banking is again separated from deposit banking. If a bank wants to develop a “financial products” division, it needs to get out of the mom-and-pop deposit business. Firewalls between where citizens save their money and where financial institutions trade their securities should extend to banning common boards, executive and operating officers. The separation must be real. Branch banking (outlets in multiple states) should require a reserve fund be kept at corporate against a companywide failure, and it should be in addition to the reserves held at each branch.

The derivatives market is already being addressed by Congress, requiring more transparency regarding the underlying assets, who owns them, and who appraised them. Foreclosure rules need tightening, in light of the vast number of institutions issuing foreclosure notices on properties for which the actual titles can’t be located, and the amount of fraudulent paperwork being filed in others. Issuing institutions must be held liable for the paperwork in filings, and foreclosure filings must be accompanied by complete paperwork.

Serious examination of Fannie Mae and Freddie Mac is long overdue. These quasi-governmental organizations have had free rein for too long, and their practices are questionable at best. The GAO needs to go over their books with the power to fire responsible executives, revoke pensions, and issue a public report to Congress with recommendations on how to restructure these agencies more closely to their stated mission.

The structural revamping of the economy needs to start with the repeal of ObamaCare. This has nothing to do with the political arguments and everything to do with the labyrinthine complexity, unintelligible metastases through the federal code, and the inevitable cost burden to future generations. This massive piece of legislation is so poorly written, so costly, and so shot-through with unadvertised consequences that it should just be erased.

As I’ve stated in these pages before, Social Security, as currently structured, is a Ponzi scheme. It survives by paying beneficiaries by taking money from newer subscribers. And even that is becoming inadequate as OMB has reported that as Baby Boomers’ retirements continue to increase, monies from the general treasury will be required to fulfill obligations. Charles Ponzi would generally leave town before this stage of the scheme.

The trust fund is a scam. Congress has long ago spent the actual money, replacing it with special-issue treasury bonds. Think about it – when those bonds are “cashed in” to make payments, guess who buys them. That’s right … taxpayers. We have to buy the IOUs in order to get our benefits[1]. If a citizen (rather than politicians) did this, he would end up at Leavenworth for interstate fraud.

An immediate fix is available by turning the revenue/payout methodology rightside up: tax every dollar of income (not just up to some level) and means-test eligibility for benefits. This would, temporarily, allow the Ponzi scheme to continue working until a restructuring can take place. The alternative would be to cut-off benefits when one’s contributions, plus interest, have been paid back, but I prefer the first method.

In the long run, Social Security needs to follow the private sector’s lead and look more like a 401(k). Businesses are turning more to this vehicle because they can’t afford to support two payrolls: the one that works for them, and the one that used to. It’s the same for government. We need to get to the point where the beneficiary is paid by the economy rather than the taxpayer. I would also eliminate pensions and health insurance for elected members of government – let them bring the plans they had before the election with them to Washington.

GAO should look at program duplication throughout government. Some projects have as many as ten or more different agencies doing basically the same thing, each with ever-increasing budgets (government budgets always increase year-over-year). These programs need to be consolidated or, in some cases, eliminated altogether. This is nothing more than turf-protection between and among agencies, and is wasteful.

Regulations that cost an industry $100 million or more should be vetted by CBO, and the results made public with time for comment, before they can be enacted. Government should not be free from cost/benefit analysis.

The non-defense agencies of government should go through a re-allocation of budget, like Secretary Gates did with DoD, before any strictly numerical cuts affect defense. We are getting dangerously close to underfunding the defense establishment (as we do at the close of every armed conflict, only to rue the day when next one comes along). Defense spending should be targeted at a percentage of GDP, rather than what’s left over during peacetime.

On tax policy, we need get back to the idea that the function of taxes is to pay for government, not to conduct social engineering. The fairest – by the non-political definition – is a flat tax without any deductions, allowing for a no-tax floor for those at or below a legitimate poverty level (not some multiple of a poverty level). Both personal and corporate. Once done, this will assure that all eligible earners will pay something for government, eliminating the moral hazard of having great swaths of voters with no skin in the game, and raising the amount of revenues collected by government at significantly lower rates for most taxpayers. The rate should be somewhere around 18% for everyone (with a 2/3 supermajority required for diddling with the rates).

The overall target for government spending should be somewhere around 20% of GDP. That will put us back at the proportion of government that allowed America to become the freest, most prosperous nation in history.

[1] These special issue bonds are “sold” to the general treasury – where the actual money went when the bonds were issued as IOUs.

Now the Hard Part

Eagle Watch — Sun, 04 Sep 2011 10:34:54 GMT

The history of bubbles is that they inflate until “conventional wisdom” catches up with reality and people realize that the inflated commodity is dangerously overvalued, and the bubble pops. This results in an overreaction, depressing the value of the commodity until it is undervalued, and people get back in, causing a dramatic upturn. Housing, in other words, won’t recover until prices are allowed to find their bottom. As long as housing prices are being propped up (ostensibly to stop evermore mortgages from going upside down), the housing recovery will be delayed. The market isn’t purging high prices because they are high, it’s purging high prices because they’re artificial.

The foreclosure problem isn’t about housing prices per se, as much as it is about who bought the houses in the first place. If you allow an arbitrary number of unqualified people buy houses, you are going to generate a commensurate number of foreclosures. That’s not even complicated theory, just common sense. The problem, of course, is that in the interim, a widening of the demand-pool raised prices on all housing (as increased demand always does), so that when the bubble popped, it immediately lowered those artificially high prices on all housing. The drama – the amount of the fall – is a function of time: how long the artificial conditions were allowed to stand. In this case, thirty years. There’s not really a good way out of this situation – that’s why they call it a moral hazard to “help” people get something they can’t afford.

Government did this, so government should do what it can to ease the market correction. The problem, of course, is that “government” is all of us, and making taxpayers – that is, those who have paid their bills and mortgages – pay for foreclosees’ problems isn’t really fair. But some form of mortgage-support program would be justified by the circumstances. It should be temporary and diminishing. Most of the people in trouble aren’t going to be able to keep the houses that are in or near foreclosure, but the transition can be softened.

Future foreclosures should be mandated to be filed with complete paperwork for which the issuing bank or organization will be held legally responsible. Then let prices go where they will. This is the quickest way to get back to a sane housing market.

Revving up the construction industry is going to be tough because of the housing slump. Commercial construction depends on business investment, and that can be fixed. Businesses are reluctant to invest because they don’t know if they will punished next year for whatever they invest in this year (including people). It’s that uncertainty thing. The administration could solve this be clearly stating its agenda for the next two years. Temporary fixes won’t convince business to do what they wouldn’t do otherwise. Rebates, one-year tax credits, one-year waivers from regulations, and so forth, won’t get business to invest. If you want to diddle with the tax code, change the rates. Permanently. If you want to waive businesses from regulation, exempt them from the regulation. Permanently. If you want to spur small business, get out of their way. Permanently. These are the things that will entice business to spend millions or billions on new ventures or expansion.

Beyond that, the administration could ease two problems – arbitrary unemployment in the Gulf region and increased isolation from OPEC – by opening up all regions of the Gulf for drilling that were open before the BP spill. That accident is now well understood, and improved requirements and inspection can prevent a recurrence. Open up Anwar (north Alaska) to exploration. Look at the regulatory obstacles to natural gas fracking and shale operations. At $70 oil, both of these technologies become economically competitive if unrealistic regulations are removed.

And don’t do any of these by phasing them in over five, ten or more years. Do it the day after it is announced.

To get pressure off of the banks’ willingness to loan again, immediately repeal the Community Reinvestment Act of 1977, allowing banks to return to financial, rather than political, criteria for loan qualification. They’re sitting on money because they have no idea when government is going to go back to home-ownership-as-a-right. And for God’s sake, quit extending unemployment benefits – we can’t afford it, and it suppresses incentive to really look for work, or to take what work is available (rather than hold out for a “better” one). If you’ve been out of work for a year or more, you’re back to entry-level. Sad, but a fact of life in the real world.

Consumer spending is a bit of a conundrum. People are saving more – which is a good thing – but it’s costing retailers – which is a bad thing. We’re going to have to get used to less consumer spending, as a rule, than in the past because consumers were as over-extended on credit as business and government. That’s the mindset everyone was in. And now that they’ve been burned, they’ll not easily go back to their old ways. That’s going to slow economic growth to a new norm by perhaps 0.5% to 1% of GDP per year. Fee-happy credit card companies will suppress the tendency to bring back full-blown deficit-living on the part of most people, but good times will bring back a more complacent attitude. We may never get back to where we were with consumer spending, but we’ll get closer as the economy heals.

The loss of government jobs should be allowed to stand. We don’t need big, bloated government, at very least during an attempted recovery where government spending crowds out private spending, which we should be trying to encourage.

This is all aimed at de-fib for the job market. Making the systemic changes to the government-business interface to realign the economic metabolism more closely to sustainability will take other, longer-term measures, which I will discuss under separate cover.

Why Does a Two-Year-Old Recovery Feel Like a Recession?

Eagle Watch — Wed, 31 Aug 2011 16:06:09 GMT

Remembering that a market economy will tend to recover from recession in around 18 months on its own, recovery strategies by government need to affect the general economy within that first year and a half, or it is wasted. Realizing that we need two or three quarters to confirm that we are in a recession, effective action is pretty much limited to a year after the administration discovers that the economy is in trouble. There are no “out years” to a responsible recovery plan.

This recession was set-off by the collapse of a housing bubble[1], whereby prices were artificially high (and climbing) due to decades of questionable federal housing policy. Because mortgages are a large part of banking holdings, and both housing and banking are largely backed by the federal government, when the bubble popped, its effect was pandemic and immediate. The credit markets froze as banks found their portfolios were upside down, and because of that, Fannie Mae and Freddie Mac were technically insolvent. As credit is the cardiovascular system of business, this had the earmarks of systemic breakdown that could threaten depression, rather than just recession. Something had to be done to revive the capital markets, and it was. Businesses are now experiencing recovering levels of activity.

But natural reactions to the cause of the recession, and Washington’s response, are still exerting downward pressure on nearly all non-business, and some business, activity. And this gets into why this recovery is acting like a recession.

The Toxic Asset Relief Program (TARP) was supposed to buy up the ill-advised loans government foisted on banks, but they had been hopelessly bundled in with other securities and sold as big-ticket derivatives to institutional investors both here and abroad, making the finding and procuring of them by government nearly impossible. Much of the allocation was used merely as grants to many banks (others were allowed to fail), and some of the funds are still unspent. Banks largely used the funds to shore up balance sheets – which is fine, as they needed to get rightside up again so they could serve their function in capital markets. This period saw the discussion of businesses that were “too big to fail,” a fiction that was not resolved by those discussions. General Motors, Chrysler and Ford also turned out to be “too big to fail,” but Ford, after looking at the strings attached to federal bailout, decided it could recover on its own. GM was given to the West Wing and Chrysler was given to the UAW (Fiat has since bought majority interest). But the reaction of banks has been to overreact and tighten up lending criteria to the point that it is stifling small business and many individuals from entering into economic activity that they otherwise would.

Since World War II, construction has been a major component driving economic recoveries. Not only does construction of new buildings and factories help make companies become more productive, but it (and new housing) also creates jobs for the overall economy as each order of concrete, for instance, demands workers to do everything from taking the order to delivering it from the warehouse to the building site, necessitating the ordering of more concrete for the warehouse, and so on. This has been stifled by the glut of overpriced foreclosures sitting on the market and high unemployment keeping many potential buyers off the market.

Given that S&P 500’s non-financial companies altogether hold more than $1.1 trillion in cash and short-term investments, it’s not as if America’s biggest companies don’t have the money to invest. So what’s to blame for the pullback in spending? “It’s a question of why is it that we no longer in a recovery can fund long-term assets – basically 20 years or more – and the answer essentially is that there’s a huge element of uncertainty in this economy,” former Federal Reserve Chairman Alan Greenspan said in a recent interview with The Financial Times [London][2]. You’re not anxious to play Blackjack if the casino is apt to change the rules after the cards are dealt. This is on top of the slow unfolding of ObamaCare, which will only increasingly make employees more expensive to have. There is no incentive for business to invest or hire right now, and every incentive to hold cash for whatever emerges next.

So banks, construction and investment haven’t come out of recession-mode yet, leaving great swaths of the overall economy underserved by key recovery engines.

Consumer spending hasn’t recovered for much the same reason that banks lending hasn’t recovered – they’re gun-shy after having been burnt by over-extension, and the abnormally high unemployment has taken a bite out of discretionary consumer spending. As our economy is 70% consumer-driven, this is not a trivial impediment to recovery.

All of this is happening on top of a generalized realization that government at all levels have reached the natural consequences of over-promising and under-funding, resulting in nationwide layoffs of government employees, keeping unemployment high and concealing whatever private employment is taking place.

Those are the primary factors feeding a jobless and anemic recovery, so any policy aimed at accelerating the recovery must deal with these factors. I have some ideas, but will hold off until next time.

[1] The moral hazard of assuming that those who could not afford a house were entitled to one anyway was set in motion by the Community Reinvestment Act of 1977, and artificially inflated housing prices until the bubble burst, deflating housing prices and rendering millions of mortgages worth more than the homes they underwrote.

[2] Cited in Nin-Hai Tseng, Four ways this economic recovery is different, in Fortune, August 30 2011, p. 31.

… and Now What?

Eagle Watch — Sat, 27 Aug 2011 13:45:00 GMT

Well, Ben Bernanke gave his Federal Reserve speech at the Jackson Hole [WY] symposium, and he didn’t mention another round of “quantitative easing” (read: printing money), so the Fed isn’t gong to help the president with his “secret plan” for restarting the economy.

Mr Obama has been lamenting that he didn’t get his “Grand Bargain” in the debt ceiling deal, which scares me into thinking that may be his plan – a sweeping new “stimulus” package, tax increases, and reams of new regulations to draw-in fees and fines. He just doesn’t get it.

A trillion dollars worth of stimulus didn’t do anything but push the deficit into Star Wars territory; another round won’t do anything but depress the recovery further. Increased taxes will discourage anyone thinking of hiring from doing so, and more regulations will only further hamper the entities that he needs to flourish. If he wants a dramatic, sweeping gesture that will clear the way for recovery, he could pare back on government activity as much as possible – keep it to helping people, not punishing them and businesses.

If it’s not a grand plan, it’s going to be simple stuff around the edges, again, having no affect other than showing that “he’s trying.” The danger is, and always has been, Congress. They spent us into this, and they are going to have to cut us out of it. The only question is when. The longer they wait, the more pain will be inflicted. The test as to whether they get it will be where they cut. If cuts aren’t to programs that have huge and growing unfunded obligations, they aren’t solving anything. If they make no structural changes to programs that have huge and growing unfunded obligations, they aren’t solving anything.

It will also be interesting to see if Democrats even bother to offer a budget before September 30. Were I a betting man, I’d bet against.

a Memo to Republicans

Eagle Watch — Fri, 19 Aug 2011 17:18:00 GMT

If they’re not careful, the Republicans could sleep-walk into a repeat of the Sharron Angle fiasco. For those not afflicted with political junkyism – that is to say, those of you out there with real lives to lead – may have overlooked (or per chance forgotten) that Nevada Tea Partyers, after an exhaustive search, found the only living human in the state that couldn’t beat Harry Reid in the fall of 2010. Delaware Tea Partyers made a similar miscue with Christine O’Donnell, although she was more of a stealth nut than Ms Angle. This year’s presidentials provide an excruciating opportunity for Republicans, under heavy Tea Party influence, to show some restraint and cool-headed thought about general elections and how they differ from primaries.

We have the perennial libertarian candidate Ron Paul, who is heavyweight champion of the world of straw polls, but can’t get much further. His nearly anarchical views, however, will play better than usual in this anti-Big-Government mood. I still don’t see him as a serious threat for the nomination.

Then there is Sarah Palin, a gargantuan fundraiser and motivational speaker (to the already convinced), but is too polarizing to win national office. While she enjoys better favorable ratings than most politicians, she also owns more negative ratings than most, and negatives are far harder to shed than positives are to gain.

Michelle Bachmann made the Tea Parties swoon in the run-up to this silly-season, but two things have happened that should sink her chances – she is gaffe-prone, and Rick Perry has entered the race. These matter because the former just gives free material to the opposition as distraction from the issues (on which they can’t win), and the latter contrasts her with someone who is also attractive to Tea Partyers but has actual executive experience and a defendable record of accomplishment.

We might yet see another candidate on the Republican side – Representative Paul Ryan (R-WI), author of the GOP FY2012 budget. He’s a serious player, but a bit wonky, lacking an easy charisma. Mr Ryan is excellent on budgets (and God knows, we need that!), but a tabula rasa on foreign matters (and God knows we need someone conversant with the rest of the world!). I don’t see him – particularly as a late entrant – as a serious threat to capture the Republican flag in 2012.

What the Tea Parties must remember is that for the general election, the Republicans need to field a counter-Obama, not an anti-Obama. Both camps need the Independents in order to win, and a low turnout favors the incumbent – the best organized will probably net a higher percentage of a thin turnout, and Democrats, in general, and Unions and Blacks, in particular, are historically better organized then Republicans. Tea Parties are capable of mounting an impressive Get-Out-the-Vote effort, but it must be remembered that these really are grassroots people. They are political neophytes, especially at the national level. The candidate must generate enthusiasm in not-Obama voters, but must do so without high negatives. This should be rather easy this cycle, as the incumbent has most Independents looking for an alternative to vote for. Republicans need an alternative, not a mirror-image extremist.

The race, as I see it now, will coalesce into a dual between Mitt Romney and Rick Perry. Both can appeal to Independents (Romney leads here), and both can energize the Republican base (Perry leads here). Each campaign should begin (today) working with the other candidate in mind, because each needs to tack a different course through the primaries. Both should scrupulously follow Ronald Reagan’s Eleventh Commandment and not beat each other up – sell themselves to the voters rather than trashing their opponent.

This election is about more than any candidate, or even Barack Obama. The current administration is out of control because it has yet to demonstrate that it understands how this country works. Nothing they’ve tried has worked, and nothing they’ve tried would have passed a simple referendum. They are operating in the dark, and the importance in 2012 will be to replace them, and if the Tea Party doesn’t go off the deep end, a la Nevada or Delaware, the actual Republican candidate doesn’t really matter. Can’t be worse.

Here’s an Idea

Eagle Watch — Wed, 17 Aug 2011 12:46:00 GMT

Consumer confidence is at an all time low. More people believe that the country they give their children will be worse than the one they got from their parents than at any time since that question has been asked. Our “recovery” is European normality (flat GDP growth, 9+% unemployment). Our foreign policy makes our allies nervous and delights our adversaries. Our debt has crossed into banana republic territory at over 100% of GDP. Congress seems incapable of getting anything other than meaningless cosmetics done, and our president has yet to tell us how he intends to proceed (he does, he tells us, have a secret plan that he will reveal to the SuperCommittee – just as soon as Congress gets back from vacation). Nobody believes it will contain anything new, nobody believes it will contain anything other than diddling around the edges (payroll tax holidays, patent reform, trade deals he has had on his desk since day-one, etc).

This all leads me to an idea for a Republican slogan for the upcoming election – Hope and Change!

the Rest of the Year is Yours

Eagle Watch — Sun, 14 Aug 2011 13:12:53 GMT

We got to Cost of Government Freedom Day on Saturday, August 13. We worked 41 days to pay for the $1.5 trillion federal deficit; 62 days to pay for the $2.3 trillion federal non-deficit budget; 44 days to pay for the total of $1.6 trillion of state and local government spending; 49 days to pay for the $1.8 trillion cost of complying to federal regulations; 77 days to pay for the $2.8 trillion direct costs of federal regulations themselves[1]. That’s 273 days of your labor to pay for the cost of government – 75% of the year, you’re working for everybody else, 25% of the year you’re working for yourself and your family[2]. And liberals want more!

Wonder why people feel like we’ve lost our country? We have, and it’s being siphoned off by those we elect to “represent” us. By spending their taxpayer-paid days promising voters free this and free that; mandating activity by states or individuals with only partial or no funding; regulating with a sledgehammer and economizing with a scalpel; stealing money we have put into Social Security and Medicare (replacing it with Treasury Bonds that we must buy back in order to pay our own benefits); voting themselves pay raises at midnight sessions; photo-op’ing their way around the country and calling it official government business – the list goes on ad nauseum. The fact is, the government’s chief constituent is government. In their view, we are there just to pay the bills, and if not quickly enough, then we aren’t giving our “fair share.”

Yes, the perpetrators of these obscenities are politicians, but the responsibility is ours. The American polity has become lazy, complacent and out-of-touch with what’s being done to us in our name. We have allowed our federal government to evolve into a crony-driven ruling class that operates the political and economic mechanisms to grow their own power and to widen their influence-peddling footprint.

To paraphrase Britain’s Ms Thatcher, Liberalism works until you run out of everybody else’s money. Well, we’re three-quarters of the way there.

[1] These numbers were calculated by taking the cost of each category and dividing by the per working capita national income, to find the amount of each category assigned to each worker, and dividing that by eight to find the number of days of work it would take to pay that bill.

[2] By the way, it takes 19 days to pay for defense (which includes Iraq, Afghanistan and the intelligence budget) and 41 days to pay for entitlements. It took 5½ days just to pay for servicing the national debt (before President Obama took office).