Tuesday, December 9, 2008

Deficits and the Future

Original Link: http://www.nytimes.com/2008/12/01/opinion/01krugman.html


Right now there’s intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall. Others, however, worry about the burden that large budget deficits will place on future generations.

But the deficit worriers have it all wrong. Under current conditions, there’s no trade-off between what’s good in the short run and what’s good for the long run; strong fiscal expansion would actually enhance the economy’s long-run prospects.

The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing “crowds out” private investment — that the government, by issuing lots of debt, drives up interest rates, which makes businesses unwilling to spend on new plant and equipment, and that this in turn reduces the economy’s long-run rate of growth. Under normal circumstances there’s a lot to this argument.

But circumstances right now are anything but normal. Consider what would happen next year if the Obama administration gave in to the deficit hawks and scaled back its fiscal plans.

Would this lead to lower interest rates? It certainly wouldn’t lead to a reduction in short-term interest rates, which are more or less controlled by the Federal Reserve. The Fed is already keeping those rates as low as it can — virtually at zero — and won’t change that policy unless it sees signs that the economy is threatening to overheat. And that doesn’t seem like a realistic prospect any time soon.

What about longer-term rates? These rates, which are already at a half-century low, mainly reflect expected future short-term rates. Fiscal austerity could push them even lower — but only by creating expectations that the economy would remain deeply depressed for a long time, which would reduce, not increase, private investment.

The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn’t just a hypothetical argument: it’s exactly what happened in two important episodes in history.

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.

Just to be clear, I’m not arguing that trying to reduce the budget deficit is always bad for private investment. You can make a reasonable case that Bill Clinton’s fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade, which in turn helped cause a resurgence in productivity growth.

What made fiscal austerity such a bad idea both in Roosevelt’s America and in 1990s Japan were special circumstances: in both cases the government pulled back in the face of a liquidity trap, a situation in which the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity.

And we’re in the same kind of trap today — which is why deficit worries are misplaced.

One more thing: Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment — of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run.

Should the government have a permanent policy of running large budget deficits? Of course not. Although public debt isn’t as bad a thing as many people believe — it’s basically money we owe to ourselves — in the long run the government, like private individuals, has to match its spending to its income.

But right now we have a fundamental shortfall in private spending: consumers are rediscovering the virtues of saving at the same moment that businesses, burned by past excesses and hamstrung by the troubles of the financial system, are cutting back on investment. That gap will eventually close, but until it does, government spending must take up the slack. Otherwise, private investment, and the economy as a whole, will plunge even more.

The bottom line, then, is that people who think that fiscal expansion today is bad for future generations have got it exactly wrong. The best course of action, both for today’s workers and for their children, is to do whatever it takes to get this economy on the road to recovery.

Saturday, December 6, 2008

CEOs “Cashed Out” Prior To Economic Crisis

Original Link: http://www.futurefastforward.com/component/content/article/635

By Tom Eley

Balzac’s maxim that “behind every great fortune lies a great crime” may yet prove a fitting epitaph for American capitalism. A recent survey by the Wall Street Journal reveals that CEOs at major US financial and real estate firms converted tens of millions of dollars of overvalued stock into cash prior to the eruption of the current financial crisis, even as many of their corporations approached the precipice.

The Journal analyzed the fortunes of CEOs from 2003 to 2007 based on executive compensation and stock sale data. Fifteen of these CEOs took home more than $100 million in cash during this period. At the high end was Charles Schwab, who made over $816 million from his self-named accounting firm, almost all of it from stock sales.

Of the 120 publicly traded firms the Journal analyzed, CEOs cashed out a total of more than $21 billion. However, data was gathered only from publicly traded companies, and thus does not include similar fortunes that have been made by “hedge fund chiefs, Wall Street traders, and executives who sold their companies outright.” Nor did it include data related to exit packages, the multimillion-dollar “golden parachutes” awarded to retiring or fired executives.

The Journal’s findings underscore the parasitism and criminality of the US financial elite. Defenders have long justified extravagant CEO pay by claiming that these were the talented “risk-takers” who generated enormous wealth for investors. But the Journal’s data shows that there is no correlation between compensation and a firm’s success. On the contrary, many CEOs rewarded themselves just as their corporations approached ruin.

These included Richard Fuld, the CEO of Lehman Brothers, who transformed his firm’s stock into well over $100 million in cash. When added to his salary and bonuses, Fuld pocketed nearly $185 million in the five years before 2008, even as he guided his 150-year-old investment bank to ruin. James Cayne of Bear Stearns did nearly as well at his investment bank, collecting over $163.2 million, the vast majority of which was garnered from selling stock that would soon be scarcely worth the paper upon which it was printed.

Maurice Greenberg of American International Group (AIG) made $132.8 million between 2003 and 2005, when he was forced to resign. Well over $100 million of this came from windfall stock sales of the giant insurer. AIG collapsed in September, but was determined to be “too big to fail” by the federal government, and was bailed out twice in less than one month to the tune of some $120 billion.

In August, the sub-prime mortgage giant Countrywide Financial Group collapsed spectacularly, and was absorbed by Bank of America. In the previous five years, however, Countrywide’s CEO, Angelo Mozilo, took home $471 million, over $400 million of which came from sales of the company’s soon-to-be-worthless stock.

A look at the sectors of the economy where these richly remunerated executives worked, moreover, demonstrates the advanced rot of the US economy as a whole. Without exception, they represented corporations that engaged in financial speculation—“industries closely tied to the financial crisis,” as the Journal puts it—and that produced no real value. These until recently “vibrant” parts of the economy functioned only to siphon off enormous social wealth and deposit it in the bank accounts of the CEOs and big investors.

One example the Journal considered is the private student loan sector, which made Daniel Meyers, the CEO of a firm called First Marblehead, a very wealthy man. Marblehead specialized in servicing loans to students who had “exhausted the cheaper government-backed variety,” and then repackaging and selling the debt to big banks such as Bank of America. Meyers earned nearly $100 million, almost all of it in the sale of company stock; together with other Marblehead insiders, $660 million was taken. The Journal notes that Meyers used $10.3 million of his fortune to buy an ocean-front property in Rhode Island—the state with the highest unemployment rate. Meyers tore down the villa that was there and has put up a 38,000-square-foot mansion he named, befitting a pirate, “Seaward.”

Another sector of the economy that has proved highly lucrative for CEOs is that of home mortgages. In addition to the aforementioned case of Angelo Mozilo and Countrywide, the Journal highlights the case of New Century Financial, the nation’s second largest subprime lender. While the lender is now bankrupt, over a period of four years its three leading executives took home a combined $74 million. The Journal also mentions the case of Herbert and Marion Sandler, who made $2 billion off selling their mortgage firm, Golden West Financial Corp., to Wachovia in 2005. This purchase likely contributed to the demise of Wachovia, which collapsed in October and was bought out by Wells Fargo.

In the field of “credit-default swaps,” Michael Gooch made $82.5 million through his firm GTI Group. Over $77 million of this came from a remarkably well-timed sale in May of 2006. Since then, GTI’s stock has lost over 90 percent of its value. Gooch owns three mansions, and boasted to the Journal that he could pay off his only debt, a $1 million mortgage, “with the spare change in my bank account.”

The Journal notes with some surprise that one of the most highly remunerative fields was that of “home-building.” The wealth accumulated by CEOs in this sector is a clear byproduct of the speculative real estate bubble that emerged over the last decade. Toll Brothers, specializing in building suburban mansions, made Robert and Bruce Toll three quarters of a billion in cash, largely in stock sales. The company has lost 74 percent of its value in the past year.

Chad Dreier, CEO of Ryland Group, made $181 million building homes in “hot markets” such as Las Vegas that have now gone bust, exposing thousands of families to foreclosure. Dwight Schar, the CEO of a building firm called NVR, took home $626 million in 2003-2007, almost all from the sale of stock. Schar spent about $86 million of this fortune in 2005 to buy the Palm Beach, Florida estate of billionaire Ronald Perelman. The Journal notes that the 11-acre oceanfront complex includes two swimming pools and a tennis court.

It is perhaps a sign of the times that the Wall Street Journal, long a mouthpiece of US finance capital, would run a prominent article that questions the enormous personal fortunes built up by CEOs through dubious means even as their corporations sailed toward disaster. Running such an article aims in part, no doubt, to appease the rage of thousands of middling investors who have lost their shirts in the economic crisis.

In any event, the criminal methods of these CEOs, who have led their companies and American capitalism as a whole to the brink of ruin, do not derive from personal greed alone. In their criminality and nearsightedness the CEOs reflect, instead, the narrowing horizon and historical decline of US capitalism, in which the accumulation of extreme wealth long ago lost whatever connection it had to the creation of real value.

Every Trick in the Book

Original Link: http://forum.prisonplanet.com/index.php?action=printpage;topic=72856.0

By Mike Whitney

"Conditions have deteriorated on a scale and with a speed that no one could have predicted just a few months ago. Market conditions of unprecedented strength are roiling the world's financial markets. The global economy is either in, or close to, recession and 2009 is not likely to be a year of great recovery." Brett White, chief executive officer of CB Richard Ellis, LA Times

November 29, 2008 "Information Clearinghouse" -- Without any public debate or authorization from Congress, the Federal Reserve has embarked on the most radical financial intervention in history. Fed chairman Ben Bernanke is trying to avert another Great Depression by flooding the financial system with liquidity in an attempt to mitigate the effects of tightening credit and a sharp decline in consumer spending. So far, the Fed has committed over $7 trillion, which is being used to backstop every part of the financial system including money markets, bank deposits, commercial paper (CP) investment banks, insurance companies, and hundreds of billions of structured debt-instruments (MBS, CDOs). America's free market system is now entirely dependent on state resources.

With interest rates at or below 1 percent, Bernanke is "zero bound", which means that he will be unable to stimulate the economy through traditional monetary policy. That leaves the Fed with few choices to slow the debt-deflation which has already carved $7 trillion from US stock indexes and another $6 trillion from home equity. Bernanke will have to use unconventional means to stabilize the system and maintain economic activity in the broader economy.

Last Tuesday, Treasury Secretary Henry Paulson announced that the Fed would buy $600 billion of toxic mortgage-backed securities (MBS) from Fannie Mae and Freddie Mac, in effect, buying up its own debt. This is one of the unconventional strategies that Bernanke outlined in a speech he gave in 2002 on how to avoid deflation. By moving the MBS from Fannie's balance sheet to the Fed's, Bernanke was able down interest rates by a full percentage point overnight, creating a powerful incentive for anyone thinking about buying a home. But Bernanke's plan is not risk free; it increases the Fed's long-term liabilities which, in turn, undermines the dollar. This calls into question the creditworthiness of the US Treasury which is becoming more and more uncertain every day.

The Fed also initiated a program to purchase $200 billion of triple A-rated loans from non bank financial institutions to try to revive the flagging securitization market. It's another risky move that ignores the fact that investors are shunning "pools of loans" because no one really knows what they are worth. The appropriate way to establish a price for complex securities in a frozen market is to create a central clearinghouse where they can be auctioned off to the highest bidder. That establishes a baseline price, which is crucial for stimulating future sales. But the Fed wants to conceal the true value of these securities because there are nearly $3 trillion of them held by banks and other financial institutions. If they were priced at their current market value ($.21 on the dollar) then many of the country's biggest banks would have to declare bankruptcy. So the Fed is trying to maintain the illusion of solvency by overpaying for these securities and providing the financing companies more capital to loan to businesses and consumers. Once again, the Fed is stretching its balance sheet by trying to resuscitate a structured finance system which has already proved to be dysfunctional.

Bernanke would be better off letting the market decide what these debt-instruments are really worth. There are always buyers if the price is right. Just look at what happened in Southern California last month, where there was a shocking turnaround in the housing market. Home sales in Orange Country shot up 55 percent year over year in October. That's because prices have dropped 36 percent from their peak in 2007. This proves that real estate---like complex securities--will recover when investors feel that prices are fair.

Does Bernanke really believe that his maneuvering will change the direction of the market or convince investors to pay full-price for dodgy securities?

Who knows; but we do know that the Fed has no mandate to prop up asset values which the market has already decided are worth considerably less. It's the equivalent of price fixing.


In the coming weeks, the Fed chairman will probably employ many of the radical policy options he laid out in his 2002 speech. Economist Nouriel Roubini points out that nearly all of these choices "imply serious risks for the Fed" as well as the American people. Roubini says:

"Such risks include the losses that the Fed could incur in purchasing long term private securities, especially high yield junk bonds of distressed corporations.... Pushing the insolvent Fannie and Freddie to take even more credit risk may be a reckless policy choice. And having a government trying to manipulate stock prices would create another whole can of worms of conflicts and distortions.

Finally, the Fed could try to follow...massive quantitative easing; flooding markets with unlimited unsterilized liquidity; talking down the value of the dollar; direct and massive intervention in the forex to weaken the dollar; vast increase of the swap lines with foreign central banks... aimed to prevent a strengthening of the dollar; attempts to target the price level or the inflation rate via aggressive preemptive monetization; or even a money-financed budget deficit."Nouriel Roubini's EconoMonitor)

Last Tuesday's announcement suggests that Bernanke may be dabbling in the stock market already. This forces anyone who is planning to short the market to reconsider his strategy because Bernanke could be secretly betting against him by dumping billions in the futures market to keep stocks artificially high. It just goes to show that all the bloviating about the virtues of "free market" is just empty rhetoric. When push comes to shove this is "their" system and they'll do whatever they can to preserve it. If that means direct intervention; so be it. Principles mean nothing.

Bernanke's actions are likely to wreak havoc in the currency markets, too. If currency traders suspect that Bernanke is printing money ("unsterilized liquidity") to rev up the economy, there will be a sell-off of US Treasurys and a run on the dollar. "Monetization" --the printing money to cover one's debts--is the fast-track to hyperinflation and the destruction of the currency. It's not a decision that should be taken lightly. And it is not a decision that should be made by a banking oligarch who has not been given congressional approval. Bernanke's shenanigans show an appalling contempt for the democratic process. He needs to be reigned in before he does more damage.

Bernanke's attempts to revive the securitization market is understandable, but it probably won't amount to anything. The well has already been poisoned by the lack of regulation and the proliferation of subprime loans. The problem is that the broader economy needs the credit that securitization produced via the non bank financials (investment banks, hedge funds etc) In fact, the non bank financial institutions were providing the lion's share of the credit to the financial system before the meltdown. But, now that the 5 big investment banks are either bankrupt or transforming themselves into holding companies (and the hedge funds are still deleveraging) the only option for credit is the banks, and they are incapable of filling the void. The Wall Street Journal estimates that the loss of Bear Stearns and Lehman Bros. will mean "$450 billion in lending capacity missing from markets". Think about that. If we include the other investment banks in the mix, then more than $2 trillion in credit will vanish from the system next year alone. Bottom line, the breakdown in securitization is choking off credit and pushing the country towards catastrophe. If the slide continues, there could be a 40 percent reduction in credit in 2009 making another great Depression unavoidable.

Does that mean we should revive the failed system?

No, just the opposite. The markets need to be re-regulated now to restore credibility. But the Fed should looking for ways to create an emergency National Bank, which operates like a public utility, so that credit can be made available to businesses and consumers who need it now. The Treasury should also be working with Congress on a plan for public education to forestall a panic as well as recommendations for stimulus to soften the economic hard landing just ahead.

The financial system is broken and institutions will not be able to releverage fast enough to normalize the credit markets or stop the impending collapse in consumer demand. What's needed is a constructive plan to rebuild the system while minimizing the suffering of normal people. There's no sense in trying to put the genie back in the bottle or re-energize a failed system. What's past is prologue. There needs to be a serious analysis of the factors which led to the present crack-up and a plan for course-correction. It's not enough to throw stones at the Fed and its misguided serial bubble-making escapades.


Our present dilemma can be traced back to the 1980s--the Reagan era--and the rise of an organized, industry-funded movement, which advanced their business-friendly, "trickle down" ideology which, when put into practice, has led to greater and greater income disparity, unprecedented expansion of credit and, ultimately, economic disaster.

The problem is the way that the system has been reworked to serve the interests of the investor class at the expense of working people. As Wall Street has tightened its grip on the political parties, more of the nation's wealth has gone to a smaller percentage of the population while the chasm between rich and poor has grown wider and wider. The United States now has the worst income and wealth disparity since 1929 and a whopping 75 percent of the labor force has seen a drop in their living standard since 1973. The average American has no savings and a pile of bills he is less and less able to pay. Apart from the ethical questions this raises, there is the purely practical matter of how a consumer-driven economy (GDP is 70% consumer spending in US) can maintain long-term growth when wages do not keep pace with productivity. It's simply impossible. The only way the economy can grow is if wages are augmented with personal debt; and that is exactly what has happened. The fake prosperity of the Bush and Clinton years can all be attributed to the unprecedented and destabilizing expansion of personal debt. Wages have been stagnate throughout.

It's clear that the architects of the present system knew what they were doing when they cooked up their supply side theory which postulates that everyone benefits when the rich get richer. Baloney. "All boats rise" is the familiar rallying cry. Of course, it was all nonsense as the current financial crisis proves. The creation of equity bubbles is just a clever means of social engineering, just like regressive taxation. It separates the wheat from the chaff, exacerbating dormant animosities between the classes. The Fed has skillfully aided its White House counterparts in creating the same divisions that existed during the Gilded Age, further fueling the animus towards workers. But now the massive debt bubble is crashing and threatens to bring down the whole system in heap. Bernanke and Paulson are frantically trying to plug the holes in the dam rather than rebuild on a solid foundation of fair pay for productivity.

It all gets down to wages, wages, wages. If wages don't grow, neither will the economy. Author Ravi Batra sums it up like this in his book "Greenspan's Fraud":

"A bubble economy is born when wages trail productivity for some time and result in ever-rising debt. Then profits grow faster than productivity gains, and share prices outpace GDP growth. However, a time comes when debt-growth slows down, and demand falls short of output, resulting in profit decline and a stock market crash. Thus, the very force that generates the stock market bubble seeds its crash." ("Greenspan's Fraud": Ravi Batra, Palgrave Macmillan, p 152)

Batra again: "The rising wage gap feeds profits on one side and debt on the other. A time comes when the debt binge slows. That is when the demand-supply imbalance, thus far masked by swelling debt and overinvestment, comes to the surface. That is when profit begins to fall, a the nation receives a sudden jolt. First, the stock market moves sideways. But as excess supply of goods continues, share prices begin to crash. (ibid: Ravi Batra, Palgrave Macmillan, p 153)

The "trickle down" Voodoo economic model was destined to fail because it was built on a fiction. Prosperity is not possible without the equitable distribution of wealth and fair worker compensation. As the financial crisis continues to ripple through the global economy through 2009 and 2010; the focus should be on creating a system that is sustainable, which means that the needs of workers should precede those of Wall Street.

George W. Bush Belongs in Prison

Original Link: http://www.informationclearinghouse.info/article21358.htm

By Joel S. Hirschhorn

November 30, 2008 "Information Clearinghouse" -- Electing Barack Obama president was the first step in redeeming American democracy. The second step must be indicting ex-president George W. Bush, giving him a fair trial, finding him guilty of many criminal acts and putting him in prison. Forget revenge. Think rule of law and justice.

I want President Obama soon after taking office to go on television and announce the formation of a special group of outstanding jurists and attorneys to make a recommendation whether or not the US Justice Department should bring criminal charges against George W. Bush. Based on earlier analyses, including work by the American Bar Association, I have no doubt they will recommend indictment.

If moral honesty and courage have any meaning, then the nation must take seriously the concept that no president can ever be allowed to be above the law. How can President Obama not strongly support this? Surely no president must be allowed to disrespect and dishonor the US Constitution. George W. Bush broke his oath of office. His behavior was treasonous. Instead of defending the Constitution he disgraced it. Instead of protecting constitutional rights, including privacy, he sullied them. He asserted his right to ignore or not enforce laws so he could break them. Respect for the office of the presidency must never be allowed to trump truth and justice.

Millions and millions of Americans and people worldwide know that George W. Bush made 9/11 the trigger for initiating an illegal war in Iraq that has killed and maimed so many thousands of people. What Vincent Bugliosi, author of “The Prosecution of George W. Bush for Murder" called “the most serious crime ever committed in American history.” I say convict Bush of myriad counts of criminally negligent homicide related to both Iraq and the Katrina disaster and put him in prison. A former president in prison would not disgrace the presidency. It would restore honor to the office and the Constitution.

Surely millions more people now understand that George W. Bush bears responsibility for creating the conditions that encouraged greed-driven capitalism to rape and murder the middle class and push us into the current global economic meltdown. By removing government oversight and regulation he committed the greatest acts of fraud in the history of mankind. After he made American democracy delusional he made prosperity delusional.

We the people are paying the price for George W. Bush’s criminal acts and so must he. When George W. Bush is sent to prison everyone will see that American democracy has earned the respect of the world. Everyone will better understand that evil comes in many forms and that even an elected president of the United States of America can and must be recognized as a perpetrator of horrendous criminal acts.

Please President-elect Obama, make it so. Be the principled person we want you to be. Make the USA the nation it is supposed to be. Have the courage to do what Congress refused to do when it did not impeach George W. Bush. Change history by showing the world that American justice applies as equally to the president as it does to anyone else. Do not let George W. Bush escape the justice and prison sentence he deserves. Do not let respect for the presidency trump respect for justice. If we do not bring George W. Bush to justice that probably only you can make happen, then surely we do not restore respect for the office that you worked so hard to achieve.

To ensure that no future president behaves like George W. Bush we must punish him. Not merely through the words of historians, but through the physical punishment that he has inflicted on so many millions of people. In previous eras citizens would have demanded “off with his head.” Now we must demand “lock him up.” How poetic for a pro-torture ex-president. As summed up at www.imprisonbush.com : “Bush must be made accountable to the law, to serve as a lesson to all those who would attempt to destroy the American system of laws and liberty for the sake of their own power.” This is a test for both President Obama and American democracy.

If there is any kind of God in the universe, then George W. Bush must go to prison. When he does, then and only then should God bless America.

Formerly a full professor at the University of Wisconsin, Madison and a senior official at the Congressional Office of Technology Assessment and the National Governors Association, Joel S. Hirschhorn is the author of nonfiction books, including Prosperity Without Pollution, Sprawl Kills and Delusional Democracy.

Robert Dreyfuss, an independent journalist in Alexandria, Virginia, is a contributing editor at the Nation magazine, whose website hosts his The Dreyfuss Report, and has written frequently for Rolling Stone, The American Prospect, Mother Jones, and the Washington Monthly. He is the author of Devil's Game: How the United States Helped Unleash Fundamentalist Islam.

Neo-cons Still Preparing for Iran Attack

Original Link: http://www.informationclearinghouse.info/article21385.htm

By Robert Dreyfuss

December 05, 2008 "Information Clearinghouse" -- What, exactly, does president-elect Barack Obama's mild-mannered choice to head the Department of Health and Human Services, former senator Tom Daschle, have to do with neo-conservatives who want to bomb Iran?

A familiar coalition of hawks, hardliners and neo-cons expects Obama's proposed talks with Iran to fail - and they're already proposing an escalating set of measures instead. Some are meant to occur alongside any future talks. These include steps to enhance coordination with Israel, tougher sanctions against Iran, and a region-wide military buildup of US strike forces, including the prepositioning of military supplies within striking distance of that country.

Once the future negotiations break down, as they are convinced will happen, they propose that Washington quickly escalate to war-like measures, including a US Navy-enforced embargo on Iranian fuel imports and a blockade of that country's oil exports. Finally, of course, comes the strategic military attack against the Islamic Republic of Iran that so many of them have wanted for so long.

It's tempting to dismiss the hawks now as twice-removed from power: first, figures like John Bolton, Paul Wolfowitz and Douglas Feith were purged from top posts in the George W Bush administration after 2004; then the election of Obama and the announcement on Monday of his centrist, realist-minded team of establishment foreign policy gurus seemed to nail the doors to power shut for the neo-cons, who have bitterly criticized the president-elect's plans to talk with Iran, withdraw US forces from Iraq, and abandon the reckless "war on terror" rhetoric of the Bush era.

'Kinetic action' against Iran
When it comes to Iran, however, it's far too early to dismiss the hawks. To be sure, they are now plying their trade from outside the corridors of power, but they have more friends inside the Obama camp than most people realize. Several top advisers to Obama - including Tony Lake, United Nations ambassador-designate Susan Rice, Tom Daschle and Dennis Ross, along with leading Democratic hawks like Richard Holbrooke, close to vice president-elect Joe Biden or secretary of state-designate Hillary Clinton - have made common cause with war-minded think-tank hawks at the Washington Institute for Near East Policy (WINEP), the American Enterprise Institute (AEI), and other hardline institutes.

Last spring, Tony Lake and Susan Rice, for example, took part in a WINEP "2008 Presidential Task Force" study which resulted in a report entitled, "Strengthening the Partnership: How to Deepen US-Israel Cooperation on the Iranian Nuclear Challenge". The Institute, part of the Washington-based Israel lobby, was founded in coordination with the American-Israel Public Affairs Committee (AIPAC), and has been vigorously supporting a confrontation with Iran. The task force report, issued in June, was overseen by four WINEP heavyweights: Robert Satloff, WINEP's executive director, Patrick Clawson, its chief Iran analyst, David Makovsky, a senior fellow, and Dennis Ross, an adviser to Obama who is also a WINEP fellow.

Endorsed by both Lake and Rice, the report opted for an alarmist view of Iran's nuclear program and proposed that the next president set up a formal US-Israeli mechanism for coordinating policy toward Iran (including any future need for "preventive military action"). It drew attention to Israeli fears that "the United States may be reconciling itself to the idea of 'living with an Iranian nuclear bomb'," and it raised the spurious fear that Iran plans to arm terrorist groups with nuclear weapons.

There is, of course, nothing wrong with consultations between the United States and Israel. But the WINEP report is clearly predisposed to the idea that the US ought to give undue weight to Israel's inflated concerns about Iran. And it ignores or dismisses a number of facts: that Iran has no nuclear weapon, that Iran has not enriched uranium to weapons grade, that Iran may not have the know-how to actually construct a weapon even if, at some time in the future, it does manage to acquire bomb-grade material, and that Iran has no known mechanism for delivering such a weapon.

WINEP is correct that the US must communicate closely with Israel about Iran. Practically speaking, however, a US-Israeli dialogue over Iran's "nuclear challenge" will have to focus on matters entirely different from those in WINEP's agenda. First, the US must make it crystal clear to Israel that under no circumstances will it tolerate or support a unilateral Israeli attack against Iran.

Second, Washington must make it clear that if Israel were indeed to carry out such an attack, the US would condemn it, refuse to widen the war by coming to Israel's aid, and suspend all military aid to the Jewish state. And third, Israel must get the message that, even given the extreme and unlikely possibility that the US deems it necessary to go to war with Iran, there would be no role for Israel.

Just as in the wars against Iraq in 1990-1991 and 2003-2008, the US hardly needs Israeli aid, which would be both superfluous and inflammatory. Dennis Ross and others at WINEP, however, would strongly disagree that Israel is part of the problem, not part of the solution.

Ross, who served as Middle East envoy for president George H W Bush and then Bill Clinton, was also a key participant in a September 2008 task force chaired by two former senators, Republican Daniel Coats and Democrat Chuck Robb, and led by Michael Makovsky, brother of WINEP's David Makovsky, who served in the Office of the Secretary of Defense in the heyday of the Pentagon neo-cons from 2002-2006. Robb, incidentally, had already served as the neo-cons' channel into the 2006 Iraq Study Group, chaired by former secretary of state James Baker and former Representative Lee Hamilton. According to Bob Woodward's latest book, The War Within: A Secret White House History 2006-2008, it was Robb who insisted that the Baker-Hamilton task force include an option for a "surge" in Iraq.

The report of the Coats-Robb task force - "Meeting the Challenge: US Policy Toward Iranian Nuclear Development" - went far beyond the WINEP task force report that Lake and Rice signed off on. It concluded that any negotiations with Iran were unlikely to succeed and should, in any case, be short-lived. As the report put the matter, "It must be clear that any US-Iranian talks will not be open-ended, but will be limited to a pre-determined time period so that Tehran does not try to 'run out the clock'."

Anticipating the failure of the talks, the task force (including Ross) urged "prepositioning military assets" coupled with a "show of force" in the region. This would be followed almost immediately by a blockade of Iranian gasoline imports and oil exports, meant to paralyze Iran's economy, followed by what they call, vaguely, "kinetic action".

That "kinetic action" - a US assault on Iran - should, in fact, be massive, suggested the Coats-Robb report. Besides hitting dozens of sites alleged to be part of Iran's nuclear research program, the attacks would target Iranian air defense and missile sites, communications systems, Iranian Revolutionary Guards Corps facilities, key parts of Iran's military-industrial complex, munitions storage facilities, airfields, aircraft facilities, and all of Iran's naval facilities. Eventually, they say, the US would also have to attack Iran's ground forces, electric power plants and electrical grids, bridges, and "manufacturing plants, including steel, autos, buses, etc".

This is, of course, a hair-raising scenario. Such an attack on a country that had committed no act of war against the United States or any of its allies would cause countless casualties, virtually destroy Iran's economy and infrastructure, and cause havoc throughout the region. That such a high-level group of luminaries should even propose steps like these - and mean it - can only be described as lunacy. That an important adviser to Obama would sign on to such a report should be shocking, though it has received next to no attention.

Palling around with the neo-cons
At a November 6 forum at WINEP, Patrick Clawson, the erudite, neo-conservative strategist who serves as the organization's deputy director for research, laid out the institute's view of how to talk to Iran in the Obama era. Doing so, he said, is critically important, but only to show the rest of the world that the US has taken the last step for peace - before, of course, attacking. Then, and only then, will the US have the legitimacy it needs to launch military action against Iran.

"What we've got to do is to show the world that we're making a big deal of engaging the Iranians," he said, tossing a bone to the new administration. "I'd throw everything, including the kitchen sink, into it." He advocates this approach only because he believes it won't work. "The principal target with these offers [to Iran] is not Iran," he adds. "The principal target of these offers is American public opinion and world public opinion."

The Coats-Robb report, "Meeting the Challenge", was written by one of the hardest of Washington's neo-conservative hardliners, Michael Rubin of the AEI. Rubin, who spent most of the years since 9/11 either working for AEI or, before and during the war in Iraq, for the Wolfowitz-Feith team at the Pentagon, recently penned a report for the Institute entitled: "Can A Nuclear Iran Be Deterred or Contained?" Not surprisingly, he believes the answer to be a resounding "no", although he does suggest that any effort to contain a nuclear Iran would certainly require permanent US bases spread widely in the region, including in Iraq:

If US forces are to contain the Islamic Republic, they will require basing not only in GCC [Gulf Cooperation Council] countries, but also in Afghanistan, Iraq, Central Asia and the Caucasus. Without a sizeable regional presence, the Pentagon will not be able to maintain the predeployed resources and equipment necessary to contain Iran, and Washington will signal its lack of commitment to every ally in the region. Because containment is as much psychological as physical, basing will be its backbone.

The Coats-Robb report was issued by a little-known group called the Bipartisan Policy Center (BPC). That organization, too, turns out to be interwoven with WINEP, not least because its foreign policy director is Michael Makovsky. Perhaps the most troubling participant in the Bipartisan Policy Center is Obama's eminence grise and one of his most important advisers during the campaign, Tom Daschle, who is slated to be his secretary of health and human services. So far, Daschle has not repudiated BPC's provocative report.

Ross, along with Richard Holbrooke, recently made appearances amid another collection of superhawks who came together to found a new organization, United Against Nuclear Iran (UANI), which is led by Mark Wallace, the husband of Nicole Wallace, a key member of Senator John McCain's campaign team. Among UANI's leadership team are Ross and Holbrooke, along with such hardliners as Jim Woolsey, the former director of the Central Intelligence Agency, and Fouad Ajami, the Arab-American scholar who is a principal theorist on Middle East policy for the neo-conservative movement.

UANI is primarily a propaganda outfit. Its mission, it says, is to "inform the public about the nature of the Iranian regime, including its desire and intent to possess nuclear weapons, as well as Iran's role as a state sponsor of global terrorism, and a major violator of human rights at home and abroad" and to "heighten awareness nationally and internationally about the danger that a nuclear-armed Iran poses to the region and the world".

Obama has, of course, repeatedly declared his intention to embark on a different path by opening talks with Iran. He's insisted that diplomacy, not military action, will be at the core of his approach to Tehran. During the election campaign, however, he also stated no less repeatedly that he will not take the threat of military action "off the table".

Organizations like WINEP, AIPAC, AEI, BPC, and UANI see it as their mission to push the United States toward a showdown with Iran. Don't sell them short. Those who believe that such a confrontation would be inconceivable under president Obama ought to ask Tony Lake, Susan Rice, Dennis Ross, Tom Daschle and Richard Holbrooke whether they agree - and, if so, why they're still palling around with neo-conservative hardliners.

Robert Dreyfuss, an independent journalist in Alexandria, Virginia, is a contributing editor at the Nation magazine, whose website hosts his The Dreyfuss Report, and has written frequently for Rolling Stone, The American Prospect, Mother Jones, and the Washington Monthly. He is the author of Devil's Game: How the United States Helped Unleash Fundamentalist Islam.