Monthly Archives: August 2012

President Hamid Karzai’s expected cabinet reshuffle signals a growing confrontation with Pakistan after the appointment of a hardline confidante as head of Afghan intelligence. Through a variety of Taliban proxies, Pakistan and Afghanistan have been involved in intense skirmishing on their common border, even as the insurgents are getting routed in some provinces though local peoples’ uprisings.

Earlier this month the Kabul parliament demanded that Mr Karzai sack the ministers of defence and the interior for not standing up to intrusions and shelling along the eastern border by Pakistani forces and Islamabad-backed Afghan Taliban. Mr Karzai has used the opportunity to do some house cleaning, mindful of the decision he has to take soon in choosing a successor to stand for presidential elections in 2014 when his term ends. The ministers names were declared to the media by presidential aides but a formal announcement is due on Saturday.

The startling change in the expected reshuffle is the appointment of Asadullah Khalid as head of the powerful intelligence organisation, the National Directorate of Security, which is funded and partly managed by the US Central Intelligence Agency.  As a fiercely anti-Taliban former governor of Kandahar, Mr Khalid faced several assassination attempts from the radical Islamist movement. He always blamed the attempts on Pakistan’s military Inter-Services Intelligence agency. Mr Khalid and the ISI hate each other with a vengeance.

Previous fire-breathing Afghan intelligence chiefs have been Tajik, whom Pakistan found easy to condemn by describing them as pro-Indian. But Mr Khalid is a Ghilzai Pashtun from eastern Afghanistan – the very ethnic group which the ISI seeks to foster and considers loyal to Pakistan. Moreover he is a long-time confidante of Mr Karzai and has worked closely with the Americans in the past. Both facets will allow him to pursue an aggressive line towards Pakistan.

As a former minister of tribes and border affairs, Mr Khalid has recently taken credit for village uprisings in five provinces where local people have driven out the Taliban, but are also refusing to co-operate with the government. This new advent of people power across southern and eastern Afghanistan (in the provinces of Ghazni, Laghman, Nangahar, Kandahar and Baghdis) could be a positive game-changer for the US military as its troops are withdrawn by 2014.

Both Kabul and Washington are pleased with this new anti-Taliban mood, but also fearful of losing political control in key provinces bordering Pakistan to a new kind of people power that refuses to accept a government mandate. Under Mr Khalid the NDS will surely be entrusted with making sure that these movements are turned around to kick out the Taliban but embrace the government.

The ISI also loathe Mr Khalid for his role as tribal affairs minister in giving sanctuary in Kunar province to a Pakistani Taliban group that Islamabad has been trying to wipe out for several years. This group has launched a series of vicious attacks on Pakistani army outposts on the border, killing dozens of soldiers before retreating back to Afghanistan.

Afghans see this as payback for the decade-long safe havens that Islamabad has provided to the Afghan Taliban, who use Pakistan’s tribal belt to organise attacks against US and Kabul’s forces. The Americans are particularly obsessed with the Jalaluddin Haqqani network that has carried out the largest suicide attacks and is based in Pakistan’s tribal belt. Last week it received a major blow when Badruddin Haqqani, the third son of the founder, was killed by a US drone-fired missile in Waziristan.

Mr Khalid’s appointment also comes at a time when public and political anger against Pakistan is on the rise in Kabul. Mr Karzai has called off all talks with Pakistan, as officials in Afghanistan blame the Pakistani military for frustrating political reconciliation with the Taliban and the promises made by Islamabad to allow Afghan leaders to talk to the Taliban based in Pakistan. Islamabad allowed one such meeting but there was no follow-up. Pakistan itself – government or military – has no coherent Afghan policy apart from knowing what it dislikes.

There is now an ever greater risk of a border skirmish between Afghan and Pakistani forces. This could lead to either side carrying out “hot pursuit” in the other’s territory. It could also leave the Americans having to broker a peace between two neighbours whom they expected to co-operate as Washington tries to withdraw its forces out of the Afghan quagmire. Ironically, however, the Afghan and Pakistani fears about the other may be the only equation that can bring both sides to the peace table. The international pressure for Pakistan to come up with a more rational policy facilitating reconciliation between Kabul and the Taliban is building fast.

The writer is best-selling author of several books about Afghanistan, Pakistan and central Asia, most recently ‘Descent into Chaos’

There is great interest in the annual symposium of central bankers that starts tomorrow, and rightly so. Whether it is in Europe or the US, central bankers continue to carry most of the policymaking burden, and do so deep in experimental territory. There is no better place to discuss central banking than Jackson Hole, in Wyoming.

Many people are eager to hear more about the framework that underpins the thoughts and actions of Ben Bernanke, US Federal Reserve chairman. Some are even hoping for another policy leap. (Similar expectations for Mario Draghi, the president of the European Central Bank, were dashed by Tuesday’s announcement that he was cancelling his panel participation – more on this later.)

We have been spoiled in recent years as Mr Bernanke has used Jackson Hole to share insights on the what and the why of unconventional monetary policy. In the process, he has provided us with a better understanding on how it supplements the diminished impact of traditional monetary policy, especially with interest rates long floored at “exceptionally low levels” and forward guidance extended substantially.

During his tenure as Fed chairman, Mr Bernanke has supplemented academic (2006-07) and historical (2008-09) perspectives with forward looking ones. In 2010, he laid the ground for the second stage of quantitative easing, or QE2 – the direct purchase by the Fed of Treasury securities in order to push investors out the risk spectrum and target macroeconomic outcomes (rather than just QE1’s normalization of financial markets).

In 2011, he took another step, providing us with the context for “the twist” – the combination of security purchases and sales aimed at flattening the yield curve. In addition to inducing further risk-taking, this sought to reduce borrowing costs in the economy without impacting the size of the Fed’s balance sheet (though it did change the risks facing the balance sheet).

Throughout, Mr Bernanke indicated that exceptional Fed activism is not the metaphorical slam dunk. It involves, to use his elegant characterisation, a delicate balance of “benefits, costs and risks”. Indeed, one of the first things that will be looked at on Friday is his assessment of this trio’s historical evolution.

There will also be interest in Mr Bernanke’s characterisation of policies that fall outside his purview, particularly fiscal. Over the last few months, the Fed chairman has increasingly visited this political territory. And not just to warn about the dangers of the fiscal cliff. This also relates to whether he is sufficiently comfortable to push his Fed colleagues to a nominal gross domestic product target, especially when congressional polarisation limits the scope for proper fiscal policy coordination.

Such a move, from an intermediate policy target (asset prices) to a more-narrowly defined macro-economic one, is part of the policy leap that some are urging Mr Bernanke to make on Friday. It certainly would be viewed by markets as a favorable development as a GDP target would effectively re-price the “Fed put.” And to maximize effectiveness, hyper-activists also want him to follow the Bank of England in pursuing credit easing.

A policy leap of this nature is a possibility but far from a high probability, at least not as of yet. Rather than push out the policy envelope again, Mr. Bernanke is likely stick to the content of the FOMC minutes released last week, listing future options and re-iterating the general commitment to do more if needed.

Which brings us to Mr. Draghi. According to an ECB spokesperson, his trip was cancelled due to a “heavy workload.” This sounds right given extensive preparations ahead of important European decision points in September. But there is also something else.

With some people pushing him to put meat on the new policy bone announced at the last meeting of the ECB three weeks ago – including specifying a band for yields on Italian and Spanish bonds – Mr Draghi would have faced significant risks. Jackson Hole is neither the place nor the time for him to preview new ECB policy proposals; and this is before factoring in the differences with Germany’s central bank. Accordingly, his most probable course of action, that of reiterating Europe’s recent policy progress and the ECB’s vigilance, would have been met with disappointment from those who wrongly believe that the institution, by itself, can (and should) solve Europe’s crisis.

Having used brilliantly-crafted words to buy a few weeks of market tranquility, the last thing central bankers want today is to use Jackson Hole to prematurely signal the difficulties of implementing on their own sufficient follow-up actions.

Amid all the hoopla surrounding the choice of Paul Ryan as the Republican candidate for vice president, and Senate candidate Todd Akin, let us not forget the still significant matter of Mitt Romney’s tax returns and what they say about the sorry state of US tax policy.

On that front, Mr Romney remains unrelenting in his refusal to release more than two years of filings, causing political opponents and cynics to continue to mutter darkly about what awfulness they might contain.

Should Mr Romney eventually yield, I believe that at a minimum, we will see nauseatingly more of the same: an immensely wealthy businessman who stretched every crack in the tax code to the breaking point and possibly beyond.

Like Mr Romney, I have labored in the private equity vineyards and am familiar with many of the loopholes available to practitioners of that art. But Mr Romney unearthed crevices that I never knew existed and worked the tax code to greater advantage than I’ve ever heard of a private equity executive doing.

Not all of Mr Romney’s manipulation was arcane; his headline tax rate of 14 per cent results largely from the dramatic cuts in taxes on capital gains and dividends engineered by former president George W. Bush.

Since becoming known, that low rate has been a source of irritation not only to less fortunate Americans (famously, Warren Buffett’s secretary pays more) but often also to highly paid wage slaves whose salaries and bonuses are fully taxed at a top rate of 35 per cent.

And that’s far from the only way that Mr. Romney has kept his payments to Washington so low for someone with $20.9m of income last year.

For one thing, what is considered capital gains for Mr. Romney and taxed at 15 per cent – the well-known“carried interest” received by private equity and hedge fund managers –would be considered wages in a more rational world and taxed at 35 per cent.

But Mr. Romney has even elasticized this provision. He left the private equity business in 1999 and yet continues to claim the 15 per cent rate, at best a grey area under Internal Revenue Service rules.

And that’s just the beginning. Like most Americans, Mr. Romney has an individual retirement account (known popularly as an IRA or a 401k). Unlike most Americans, Mr. Romney’s IRA contains as much as $100m, notwithstanding the relatively low ($30,000 at present) limit on annual contributions to these accounts.

We don’t know how Mr Romney shoveled so much into his IRA; my guess is by “selling”Bain investments at substantial discounts or carried interest at nominal valuations.

What we do know is that he is deferring paying taxes on income earned by these funds, an interest free loan from the US government worth millions of dollars a year.

Then there’s the matter of inheritance taxes. Notwithstanding strict limits on tax free gifts to heirs, Mr. Romney has managed to put aside as much as $100m for his descendants, probably using the same mechanisms as he did with his retirement plans, thereby potentially postponing death duties of roughly 35 per cent of the value of the trusts for multiple generations.

That’s not all. By structuring these vehicles as “grantor trusts,” taxes on the income from the investments are paid by Mr Romney rather than by the trusts, which allows the assets of the trusts to accumulate faster, thereby obviating still more inheritance taxes.

Much has been made of Mr Romney’s offshore accounts, including a now-closed Swiss bank account. Tempted as I am to pile on Mr. Romney for those, unless he engaged in patently illegal tax evasion, which strikes me as highly unlikely, I mostly can’t figure out how they have helped him avoid US taxes.

With one exception: Mr. Romney appears to have taken advantage of the ability of hedge fund managers (Bain had hedge funds as well) to defer indefinitely taxes on carried interest profits attributable to investors in their offshore entities. While now closed for new deferrals, Mr. Romney is (once again) receiving an interest-free loan potentially worth millions each year.

Beyond the prurient interest in a rich man’s finances and the more high-minded question of Mr Romney’s character, the presumptive Republican nominee’s successful efforts to minimize his taxes speak volumes about the Swiss cheese nature of America’s tax code.

Ironically, Candidate Romney himself has served up tax cut proposals that would only lighten further his already featherweight tax burden.

High on the agenda for the next President – whoever it might be – should be a long overdue wholesale revamping and simplification of the revenue code.


The Republican party, like all political parties, is not monolithic; it is a coalition of people who may or may not agree with each other on many issues but are willing to support each other on those the others care about for mutual benefit. But from time to time, one issue comes along that makes holding a party’s coalition together very difficult.

The classic example is slavery. In the 1850s, the Democratic party in the north essentially collapsed, as northern Democrats could no longer support their members in the south, who were adamantly opposed to compromise on slavery. The other major party at that time, the Whigs, tried to straddle the fence – not defending slavery, but fearful of condemning it forthrightly, lest they lose votes in the South.

As abolitionist sentiment rose in the north, the Republican party came into existence on an explicitly anti-slavery platform. The Whig party disappeared.

The closest analogy to slavery in modern American politics is abortion; indeed, anti-abortion forces often make an explicit connection between the denial of “personhood” to both slaves and unborn fetuses.

The issue has been an important issue in American politics since at least 1973, when the Supreme Court decided that the right to an abortion is guaranteed by the Constitution. Previously, abortion was not a federal issue but one that the states decided for themselves.

In the years since, those who would prefer to return to the status quo ante have largely coalesced in the Republican party. As their support within that party has grown, anti-abortion forces have pressed ever harder for it to take an absolutist position on the issue – no legal abortions whatsoever even in cases of rape or incest.

According to polls, this is an extreme position not shared by most Americans. By and large, the Republican strategy has been to pay lip service to anti-abortion extremists – lots of rhetoric, little legislative action. This is necessary because many Republicans, especially middle class women, strenuously oppose the extremist position and would abandon the party on that issue if they thought it would actually attempt to ban abortion altogether.

The fault line has long been an exception for rape and incest, which most people consider reasonable. But the extremists cannot abide that. To them, abortion is murder and making any exception means sanctioning murder.

On 19 August, Congressman Todd Akin of Missouri, who is the Republican party’s nominee for the US Senate this year, focused attention on this fault line by stating in a television interview that abortion should be prohibited even in cases of forcible rape, which he foolishly called “legitimate rape.”

On August 21, the Republican Party’s platform committee, which is meeting in Tampa, Florida, in advance of next week’s party convention, adopted a plank endorsing an amendment to the Constitution that would ban all abortions without exceptions.

These events will almost certainly make abortion a major issue in the presidential campaign. Clearly, this will be to the disadvantage of Republicans, who would prefer to continue their practice of appealing to anti-abortion extremists without endangering the votes of women and other members of the party likely to bolt if forced to accept the extremist position.

The attention on abortion also prevents Republicans from focusing the campaign on the economy, which is Barack Obama’s weakness. But given the power of anti-abortion extremists within the Republican Party, it may be impossible to finesse the issue that matters most to them this year and could tilt the election toward Mr Obama.

For the third time in three years the Europeans’ stance on Greece is economically inconsistent.

The first time was in 2009-2010 after then prime minister George Papandreou indicated that he would need to file for assistance from the International Monetary Fund. The European response was to reject the principle of IMF intervention while not offering an alternative to it. It took several months until an agreement was found, in May 2010, to combine European and IMF conditional support.

The second time was in 2010-2011 when Greece’s solvency became the urgent issue at hand. Two camps emerged. One advocated swift debt restructuring, emphasising that Greece was a unique case and that markets could be convinced that no other European country would follow suit. The other one stressed the adverse spill-over effects of a default and favoured keeping Athens afloat through cheap loans. The compromise was to lend at penalty rates while letting markets expect that restructuring would perhaps come, but at a later date. Each of the two positions was internally consistent but the compromise was not. It took more than a year, until the second half of 2011, to recognise this contradiction.

The third time is now. Again, Europe is divided. One camp, well represented in northern Europe, considers that Greece should leave the eurozone because it is not fit for purpose either economically or politically. This view is actually held by both eurosceptics (who want to demonstrate that exit is possible) and europhiles (who hope to win over opposition to further integration). The latter camp, more vocal in France and southern Europe, is adamant that the integrity of the eurozone must be preserved, because Greece’s departure would have adverse contagion effects on other southern countries.

Each of these positions is also internally consistent. But it is not consistent to urge an exhausted country to make all possible efforts to meet the targets of the IMF/euro area programme, while fuelling anticipations of a forced exit. For domestic agents, the risk of the financial disruptions an expulsion would cause acts as an incentive to export capital or hoard cash. For foreign investors, including overseas Greeks, it is an incentive to refrain from investing in the country in the hope of future bargain acquisitions. In such conditions one should not wonder why investment in the first quarter of 2012 was only 46 per cent of its level four years previously (in fact one may wonder why it was still so high). But without investment and a return of confidence, Greece is bound to remain caught in a vicious circle of recession and whatever its efforts, it is unlikely to meet its creditors’ demands.

European leaders should choose. If they really think they would be better off with Greece out they should offer it an exit package. Evidently, an exit will cost them dearly because the sharp currency depreciation that is certain to take place will force the country to default on its euro liabilities. Also, Athens will remain in need for financial support, if only because it is still far from having returned to budgetary and external balance.  The credibility of the euro will suffer and other countries will have to be protected from contagion. And finally the EU cannot forget Greece because whatever its fate in the EU, it will remain in Europe and will matter for the whole continent. So on closer examination the option looks less attractive and more dangerous than seems at first sight. But at least it has an internal logic.

If the Europeans accept that a Greek exit is not in their interest, they should recognise the efforts made and give it a real chance to adjust further and recover within the euro. Obviously they cannot remove the redenomination risk entirely but they can at least make speculation of exit a less-assured bet. Beyond a reasonable extension of the assistance programme, this means giving clear signals that Europe believes in a possible success. One possibility, which is certainly not without difficulty, would be a conditional relief on the debt to official creditors, what the jargon calls official sector involvement. Another one would be to foster public and private equity investment, through debt-equity swaps, investment by international financial institutions (such as what the European Bank for Reconstruction and Development has done in eastern Europe), or a revival of the too quickly derided Eureca plan for the pre-privatisation once proposed by Roland Berger, the consulting firm. The key is that private agents can only believe in the revival of Greece if the Europeans themselves invest in it.

When Prime Minister Samaras meets with fellow European leaders later this week, he should offer them a small gift for late summer reading: a copy of Alfred de Musset’s play, A door must be either open or shut. It is short and inspiring.

On the surface, it seems strange: Spain is offered large loans at below-market interest rates, coupled with significant additional support by a regional central bank willing to buy the country’s government debt on the secondary market. Yet the government is reluctant to officially request this help.

However, Spain’s reluctance is rational, rather than a reflection of stubborn national pride or a misunderstanding on the part of the government. It is a well-founded hesitation to follow others in becoming a ward of the eurozone. Until the continent’s leaders fix these contradictions, the euro crisis will continue to pose a threat to Europe’s historic regional integration efforts.

In theory, there are four immediate upsides to the assistance offered to struggling members of the eurozone: it provides direct, cheap and sizeable financing to facilitate a country’s implementation of comprehensive reform measures; it unlocks financing from the International Monetary Fund, also at below-market rates; it indirectly lowers the cost of government debt by shifting liabilities from the private to the public balance sheets; and it reduces some of the obstacles facing credit-rationed companies and households.

Together, these advantages offer recipients the ability to minimise crisis-induced losses in output and jobs. Yet, judging from the first three years of European financial packages (for Greece, Ireland and Portugal), theory is yet to translate into practice.

Rather than crowd-in private funding, the packages have signalled the end of a recipient country’s access to private capital markets. With that, borrowing costs have remained too high and access to new credit severely limited. Not surprisingly, growth and new employment have repeatedly fallen short of objectives.

Two major factors speak to this contrast between theory and practice.

First, the official financing packages have served to subordinate private loans. Due to this subordination, private creditors have shown no appetite to co-finance with the official “troika” of the European Central Bank, the European Union and the International Monetary Fund. Instead, they have used the availability of official financing to exit.

To make things worse, some of this exiting has been accompanied by structural changes that make it highly unlikely that capital will return any time soon. Just witness investment guideline changes that exclude peripheral European economies from the permissible investment universe, and the related credit rating downgrades.

Second, the underlying programmes are yet to strike that delicate balance between budgetary austerity and growth-enhancing measures, including competitiveness-enhancing reforms. This does more than limit countries’ ability to generate future income and be in a stronger position to repay debt. It increases domestic popular resistance to European financial packages, serving also to encourage capital flight by residents (including large withdrawals from bank deposits).

I suspect that these two factors will be at the top of the agenda of Mariano Rajoy, Spain’s prime minister, when he travels to Germany. He has likely been encouraged by recent remarks by ECB and German officials which suggest greater recognition among critical European decision making. But translating this into effective changes on the ground will not be easy.

In a press conference last month, Mario Draghi, the ECB president, indicated that he would look for ways to minimise the subordination problem. This would involve a relaxation of the central bank’s preferred creditor status. But doing so would risk undermining the standing and credibility of an institution that needs safeguards as, almost by definition, it is expected to lend into highly stressed credit conditions.

Shifting the policy balance of the underlying packages is no easy feat either given the time inconsistency between immediate austerity measures and the growth side of the adjustment equation. In addition to complex design issues, this requires even more external assistance at a time when official creditors (and many of their political constituents) are wondering whether they are simply pouring taxpayer money into a deep hole.

European leaders will thus have to work hard to find innovative and imaginative solutions to both these issues. We should all hope that they are successful. If not, Spain’s hesitation will be followed by two new twists in Europe’s crisis: within a few weeks, a significantly larger economy would join three other eurozone members in becoming a ward of the European state; and Italy, an even bigger economy, would risk slipping to where Spain is today.

The writer is the chief executive and co-chief investment officer of Pimco


For the first time the Pakistan army has admitted to the dangers of growing Islamic militancy and warned that if the entire nation does not unite against it “we’ll be divided and taken towards civil war”.

General Ashfaq Parvez Kiyani, the army’s chief,  made the forthright comments in a speech on August 14 in front of officers celebrating Pakistan’s Independence Day. “We realise the most difficult task for any army is to fight against its own people but…no state can afford a parallel system or a militant force,” he said.

After years of denial that militancy posed a threat to Pakistan and blaming outsiders such as India, the US and Israel for backing terrorist groups in the country, Gen Kiyani finally admitted that “the fight against extremism and terrorism is our own war and we are right in fighting it”.

His comments are a departure from what the army, the government and the political elite have offered as explanations for rising militancy and sectarian killings in the past that have almost brought the nation to its knees. Every day, 10-30 people are killed in multiple acts of violence – most of it by Islamic extremists – but there is no accountability for the perpetrators and few are ever caught or punished.

Gen Kiyani also made it clear that the army will not tolerate a dual system of governance by the militants and he asked for the civilian government’s support for army operations, which has been sorely lacking in the past. “It is imperative that the entire nation is united in this context because the army can only be successful with the co-operation of the people,” he said.

His statement comes as US pressure on Pakistan continues. Leon Panetta, US defence secretary, said that the Pakistan army was ready to go into North Waziristan, a key militant base area, to root out terrorists. Some US Congressmen are also trying to fix Pakistan with the label of state sponsor of terrorism, which could result in the country being seen as another North Korea.

Gen Kayani’s positive words will now require more actions. The army has pursued a dual policy allowing the Afghan Taliban, in particular the Jalaluddin Haqqani network, to operate freely out of Pakistan and attack US forces in Afghanistan. Similarly, the army and its Inter-services Intelligence (ISI) have allowed those Pakistani Taliban who do not turn their guns inwards but kill Americans to operate freely. This has infuriated the US military.

The ISI has also helped mobilise dozens of religious parties and militant groups who have launched an anti-American crusade on the streets in recent months. As a result, the ISI has been accused of harassing, intimidating and even killing journalists, human rights workers and others – something that it strongly denies.

Critics have argued that the ISI needs to be brought under civilian jurisdiction and that Pakistan needs a holistic counter-terrorism strategy that treats all extremists as a potential threat, but tries to reconcile with as many as are willing to do so.

The army has never had a strategy. Instead, it has approached the issue tactically, such as the recent whipping up of anti-American feeling by Islamic groups to put pressure on Washington during the seven month stand-off when Pakistan closed the US and Nato supply route for Afghanistan.

There are other questions that the military has never answered, such as what was Osama bin Laden doing in Pakistan before he was killed last year and who was supporting him. A host of militants from China, Turkey, the Central Asian republics, Arabian Gulf states, western Europe and other places are active with the Pakistani Taliban and more foreigners continue to come for training. All the countries affected now openly criticise Pakistan’s inability or refusal to deal with these threats, placing the country into deep isolation.

Nevertheless, Gen Kayani has certainly set the ball rolling and it is hoped that his comments will be followed by a genuine military counter-terrorism strategy as well as encourage the government and civilian politicians to come out more openly against the extremist threat.

This much you have to give Mitt Romney: by choosing Paul Ryan as his running mate he has made it impossible to avoid turning the presidential election into a genuine and long overdue debate on the nature, extent and responsibilities of American government. By doing that, whatever the outcome, he will have rendered a service to the American people, who deserve to be drawn into an all-out contest of principles rather than the usual beauty-pageant cum pratfall-watch that consume most autumn campaigns.

Because Mr Ryan (unlike the top of the ticket), is in the habit of actually attaching numbers to his budget proposals, there is a faint possibility that the debate between Americans who want to retain the institutions of the New Deal and the 1960s (such as Medicare) and those who believe that under Franklin Roosevelt and Lyndon Johnson the country took a fatal step towards collectivism, will actually have to consider evidence rather than collapse into the usual exchange of uninformed abuse that gets confused with argument.

Is there, for example, any evidence (rather than a kind of religious optimism) that by slashing tax rates on corporations and individuals without considering revenue at all, you won’t actually make the deficit that Ryan-Romney says it wants to tackle catastrophically worse, rather than better? The ancient mantra of “closing loopholes and ending fraud and abuse” has been chanted at least since Reagan and somehow there never seems enough loophole-closing to make up the sudden fiscal shortfall. Is there any evidence at all that the voucher system with which Ryan wants to replace Medicare will actually keep pace with the rising costs of insurance, rather than expanding the numbers of those shut out from care and thus increasing rather than decreasing costs incurred from habitual resort to emergency rooms? Why was it that Paul Ryan voted for George W Bush’s bail-out of the automobile industry in the autumn of 2008? Could it be that there was not a hope in hell of the usual sources of credit being made available for the restructuring Mr Romney has said he wanted unless the federal government stepped in. Why not ask the voters of Mr Romney’s father’s home state what they think about that? Someone probably will.

A “Ryanised” debate will – one hopes – force Americans to think in first principles about what they really expect from the federal government and how it should be funded. Does a majority of Americans want the federal government to get out entirely from education, even though the evidence is that the US is falling woefully behind Asian and other countries in the proficiency of exactly the skills – scientific and technological – with which the future has to be won? Does a majority of Americans want the federal government to abandon responsibility for monitoring public health – clean air and water and in the age of fracking, the price that ought or not to be paid for the securing of domestic energy sources? Are Americans perfectly happy, as the Republican position now presupposes, to end the mortgage deduction from income tax returns, and were that to happen would it have a positive or negative effect on the tender shoots of recovery in the housing market? Is a society of widening, or narrowing, income inequality, more likely to be economically dynamic?

Behind all these particular issues lies a much bigger, general one, first rehearsed in the election of 1800 fought between the government minimalist Thomas Jefferson (who won) and the likes of John Adams and Alexander Hamilton who refused to see the federal government as a threat to democracy. That debate was joined again, not so much in 1932 when Roosevelt obscured his true predilection for aggressive intervention to save the shattered economy, but in 1936 when he was unrepentant about his New Deal.

What Roosevelt, and later Johnson, powerfully argued was the authentic American-ness of what they had done; that the establishment of Social Security, the prudence of Glass-Steagall, later the creation of Medicare and Medicaid, was rooted in a long tradition of American mutualism; looking out for each other as much as oneself. Ayn Rand, the atheist libertarian who accepted no god other than the individual, and devotion to whom seems to constitute most of the claims that Mr Ryan is “an intellectual”, on the contrary, argued that those reforms represented a plot against American liberty; a stealth enslavement. Fine, let’s have a spirited exchange of views about what a Randised America would look like.

But of course Barack Obama, who is no slouch at defending the American authenticity of the New Deal, Medicare and the rest, will not be debating Mr Ryan in the autumn, more’s the pity. Which raises the fascinating possibility that what is being hailed as a “game changer” on Mr Romney’s part may end up dragging him into a game he actually doesn’t want to play. Unless he supplies the kind of detailed, data-loaded plans for what he would have in mind after the Affordable Health Care Act is repealed, he will be stuck with Ryan-vouchers and the replacement of federal obligation to helping the poor and sick with those block grants, a “solution” which amounts to kicking the problem of costs down the road to Nevada, or Alabama by the very people who make an awful lot of their indignation against can-kicking.

Over and again Mr Romney will be asked whether he supports Ryanism. If he says yes he looks like the bottom, not the top, of the ticket. If he says no, he reinforces rather than ends the impression, already taking hold of independent voters, that he is a shifty opportunist who will do whatever it takes, say whatever has to be said, co-opt whomever it takes, to change the furnishings at 1600 Pennsylvania Avenue. If he asserts himself by neutering Mr Ryan, he will incur the wrath of the very hardcore Tea Partiers he is now so eager to appease. So while the political choice for Americans has overnight become dramatically clearer, for Mitt Romney the autumn may turn into the Be Careful What You Wish For campaign.

Syria’s civil war is deepening. Rebel forces have struck in the heart of Damascus, killing defence and security officials within both the regime’s inner circle and Bashar al-Assad’s family. Sanctions are in place, and the number of high-level defections is growing. Even former UN Special Envoy Kofi Annan now says that al-Assad “must leave office.” Has the conflict reached its endgame?

Would it were so. True, Mr Assad has few reliable friends outside his entourage and arms suppliers. His country has endured enough economic damage and his government lost enough credibility with Syria’s commercial elite, its armed forces, and the country’s majority Sunnis that his days are almost certainly numbered.

But that number is not as small as many think, because his willingness to use heavy artillery to pound his people into submission and the fear among minority Alawite core supporters that only he stands between them and a dark future keeps the killing in motion.

In short, short of a targeted assassination or some other form of quick decapitation strike by the rebels, we have a worst-case scenario: A regime that can’t win but won’t quit—and an outside world willing to do little more than watch.

Yes, Syria’s increasingly battle-tested rebels can expect more help. Local friends like Turkey, Saudi Arabia and Qatar will supply them with weapons while Americans and Europeans continue to squeeze al-Assad’s government. Yet, the regime still has the heavy weapons, and fears that survival depends on absolute victory ensure the state’s willingness to use them.

Only active intervention by outsiders could quickly tip the balance in the rebels’ favor. Last week, as the regime prepared its current assault on Aleppo, Syria’s second largest city and commercial capital, a US State Department warned that a “massacre” was in the works. That’s the same word deployed to justify last year’s NATO intervention in Libya. Fearing that Muammar Gaddafi army stood ready to slaughter the civilians of Benghazi, western governments used an Arab League invitation and a UN Security Council mandate to bomb government forces and boost rebel prospects.

Yet, that won’t happen in Syria. First, this time there will be no such institutional license to kill. Russia’s government will continue to veto UN resolutions that authorise force—not just because Mr Assad is a long-time friend and arms client, but because the west’s willingness to interpret the UN mandate as broadly as possible in Libya left Moscow feeling impotent and foolish. In addition, this conflict will play out not in the Libyan desert but in the heart of Syrian cities.

Second, Americans and Europeans aren’t exactly spoiling for another fight. Syria’s armed forces are far more capable than Gaddafi’s, and Syria is much more complicated than Libya. The Obama administration wants to minimize risks in the run-up to November’s elections, and though US voters are not focused on foreign policy, a failed effort to use US airpower and weapons to tip the balance in the conflict would certainly have an impact on the president’s standing. That’s why Washington will stick with covert support and humanitarian assistance. European leaders remain fully occupied with the fate of the Euro. Sanctions must suffice. Even if the Russians and Chinese decide that Mr Assad is bound to lose eventually, they are less than eager to endorse regime change to unseat an authoritarian government—and the precedent it might create.

There is also the (entirely reasonable) fear that the “controlled demolition” of Assad’s government now under discussion in the west will leave a potentially explosive vacuum of power inside yet another complex, multi-sectarian country at the heart of a volatile region and the intersection of its many rivalries.

That’s why US defense secretary Leon Panetta recently asserted Syria’s need to “maintain as much of the military and police as [possible], along with security forces” after Mr Assad is finally gone in order to help “transition to a democratic form of government.” That’s a pre-requisite for post-Assad stability—and it’s also intended to persuade the men with guns that their future is not tied to their president’s. Yet, no one should believe that building and maintaining a delicate political balance in a country plagued with scores to settle among minority Alawites and majority Sunnis—to say nothing of introducing genuine multiparty democracy—can make progress quickly or without conflict.

Instead, Syria can expect more slow-motion tragedy. Mr Assad will cling to power for some time to come, and the bombardment of Syrian cities will continue. The government and rebels will probably establish their respective strongholds. Neighbors like Lebanon and Jordan will feel the shockwaves as refugees seek safety.

When Mr Assad’s core supporters finally switch sides, outsiders will calculate how little they can do to help re-establish order. The country will then become an open arena in which Saudi Arabia, Iran and Turkey use proxies to protect their interests and play out their rivalries.

This week’s meeting of the FOMC, the Federal Reserve’s monetary policy committee, speaks volumes to the policy dilemma facing highly activist central banks. Let us hope other policymakers and, even more importantly, their political bosses are listening.

In the run up to the meeting, there seemed to be enough data to warrant additional policy measures – from weakening economic activity (domestically and around the world) to more subdued inflation. Along with European financial fragility, this led analysts to speculate about additional measures. Equity markets rallied, as did other risk assets, helped also by signals out of the European Central Bank. Yet, when push came to shove on Wednesday, the Fed was restrained, and understandably so.

For several years now, the Fed has been leading the policy parade. The initial focus (2008-09) was to counter market failures, system fragmentation and technical contagion that erupted in the midst of the global financial crisis. And it delivered, helping to avoid a global depression.

Fed officials did not stop there. Bolstered by their successes and, more importantly, feeling they must compensate for the paralysis of other US government entities, they shifted in 2010 to a more direct targeting of economic outcomes. Here, however, they have repeatedly disappointed – both in absolute terms and relative to their own expectations.

While some would have favored even greater policy activism, the Fed’s measures have been unprecedented – from flooring policy rates virtually at zero for quite a while (and also providing forward guidance until the end of 2014) to ballooning its balance sheet in an attempt to counter the de-leveraging of the private sector and induce it take more risk. In the process, it transitioned from completing dysfunctional markets to dominating some of their functioning; and it is sowing the seeds of possible policy complications down the road while exposing itself to greater political intrusion, undermining the price discovery process, and distorting asset and resource allocations.

So while markets have been conditioned to expect ever greater central bank intervention whenever the data weakens or sovereign spreads spike in Europe, the cost-benefit equation within the Fed has gotten considerably trickier. There is now much greater appreciation that the policy response, no matter how imaginative, can do little on its own to address decisively America’s challenges of too little growth and employment, too much long-term debt and too great a political polarisation.

So, this time around, the Fed decided to talk the talk but not walk the walk. It is unwilling to do anything now, also reflecting a desire to keep dry whatever policy ammunition remains in the event that Washington is unable to deal with the fiscal cliff and Europe takes another turn for the worse. And while it signaled a willingness to do more should conditions deteriorates, I suspect that it wishes this to be in support of other policy measures rather than substituting for them.

The Fed’s attempt to overcome its policy dilemma has little chance of succeeding given the degree of political dysfunction in Washington. It is only a matter of weeks until, once again, Fed officials will feel compelled to act, and despite full knowledge that their measures will have limited effectiveness in delivering desired outcomes.

Most fundamentally, what is being illustrated again in all this is that what the US faces today is as much a political problem as it is an economic one. Until the political system steps up to its strategic leadership challenge, America will risk the trap of policy purgatory.

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