Thursday, January 8, 2009

USAID Muslim Outreach Event

Muslim Outreach Event. Remarks by Henrietta Fore Director of U.S. Foreign Assistance and Administrator, USAID
USAID Headquarters, Washington, DC, January 7, 2009

I am delighted to be a part of this important event that coincides with a new lunar and solar year along with the recent culmination of the annual Hajj. And I send my warmest wishes to all those who associate themselves with the annual pilgrimage.

Millions of Muslims have gathered from around the world to commemorate the stories of Abraham, Ishmael, Haggar and the building of a civilization based on the values of equality, egalitarianism, and equity. Today also marks the observance of Ashura - the remembrance of Imam Hussain's martyrdom.

And as we all look to this New Year, we are reminded of renewed commitments, responsibilities, and growth. It is in this spirit that we have gathered today - a diverse group - to learn, share, and build upon what works best.

During my own travels in Asia, Europe, Africa, and the Middle East, I have been struck by the tremendous power that is unleashed through successful partnerships between governments and the private sector.

In a world with ever increasing demands on resources, and with new and ongoing humanitarian crises, it is vital that USAID and other government donors reach out to and work with important actors in the international business and philanthropic communities.

For example in Afghanistan, USAID has created six public-private partnerships leveraging more than $7 million from private partners. One of these partnerships is with Cisco - the Cisco Networking Academies Program is training nearly 1,000 young Afghans (including more than 350 women) to install and maintain modern computer networks. This initiative will not only result in a trained IT workforce, but it will also provide Afghans with greater access to the Internet and on-line learning.

Further, active higher education partnerships are linking universities, publishing houses, on-line training providers and computer firms together to strengthen Afghan university digital libraries and on-line learning programs.

And numerous partnerships have been established to strengthen the productive capacity of Afghan firms, and improve their access to markets varying from marble quarrying to carpet production to agriculture.

In Indonesia, USAID works closely with the private sector to provide job training and foster youth employment. Following the devastating 2004 tsunami, Chevron and USAID joined forces to help Indonesia's government rebuild the hard-hit region of Aceh. It was clear that there were two complementary needs: infrastructural reconstruction and job creation. We met those needs by training an able workforce in the skills needed to reconstruct and rehabilitate their homeland.

One young resident in Aceh, Junaidi, had construction skills limited to pouring concrete, brick-laying, and other basic building tasks. Thanks to the joint USAID-Chevron training program, Junaidi has learned welding, masonry, electrical installation, and carpentry.

To ensure that these newly trained workers can put their new skills to good use, USAID works with Indonesia's Chambers of Commerce, road construction contractors, international organizations and others to hire trainees to full-time jobs.

Junaidi is now making door frames for new houses in Aceh, and with more and more houses being built, his hope is to eventually start his own construction company.

And in the Middle East, we have established 17 public-private partnerships, with 27 additional partnerships in the pipeline. USAID's work in leveraging private sector funds in this region dramatically expands the impact and sustainability of its programs. I see Ziad Asali sitting next to me today, so I know you have heard of our West Bank Public Private Partnerships.

And, we can do more. For example, over three decades ago, the Development Assistance Committee of the Organization for Economic Cooperation and Development (DAC in OECD) used to meet and work with the Kuwait Fund and the Arab Fund. We must reinstitute this former partnership and again collaborate with the sovereign wealth funds in the Gulf and elsewhere.

Only by working with partners such as yourselves, are we able to make a real difference and continue to promote economic prosperity and good governance around the world.

Today's gathering was the start of an important conversation in the development community. We have heard what works, and we know what the challenges are as seen by those in the field.
As you have heard today through our distinguished panelists, we must engage in a more proactive and informed manner with community leaders, members, and all stakeholders. Meaningful development is a result of creating partnerships, building upon the capacity of existing community based organizations, and giving voice to groups such as the youth who otherwise feel uninvolved or marginalized.

We have also recognized the need for more expertise in how our missions develop, design, and implement programs conducive to a cultural context. Our efforts at USAID are demonstrating that culture does matter in programming, and that relevant development does not come in a cookie cutter form.

And, there is no doubt that partnering with the private sector, as well as non-governmental organizations, has helped to channel ideas, efforts, resources and cultural approaches. Leveraging outside resources to complement official aid has increased our impact.

For example, for decades, USAID has partnered with private faith-based groups and religious leaders, particularly in urban areas, to achieve shared development goals. The knowledge and organization of these groups expands the reach of our programs. In Egypt, a USAID grant supports increased participation of marginalized groups in civil society, working through religious leaders, as well as other local decision makers.

But challenges do still exist. We know that globally, one billion youth will be entering the labor market in the next five years and only an estimated 300 million jobs will be available for them. Nearly 70% of youth live in less developed countries where they face even greater obstacles for gaining education and employment.

We also know that the Middle East and some Asian countries continue to perform far below the norm when it comes to closing the gender gap.

Access to water is another critical issue in the Middle East and Asia - and one that must be understood and addressed in the context of the beliefs and traditions of the societies that are affected. Current estimates suggest that meeting the developing world's water sector needs will require an increase in annual investments of approximately $100 billion.

And the list goes on and on…

But I will end with one challenge for all of you here today as individuals and as institutions: What can we do next? And how do we do it? Together, we must use the lens of innovation, of creativity, and of true engagement to see that development cannot take place without understanding its environment, its context. So make a partnership with a person or around an idea you heard today.

We must create opportunities through virtual networking and dialogue. USAID has already taken steps to improve our communications with you. We are revolutionizing the way we share what we know. At Global Development Commons dot-net you can now search all USAID-funded project websites and all USG development information. That is over a thousand websites with over 1 million documents, and growing.

For example, in Jordan, we are building on an existing Arabic health website,, to bring the site to a broader audience and develop private sector partnerships to ensure sustainability of the project.

Before I end, I would like to thank our distinguished guests Undersecretary James Glassman, Special Envoy Sada Cumber, and Mr. Iqbal Noor Ali of the Aga Khan Foundation USA. I would like to again acknowledge the Aga Khan Foundation USA's 25th anniversary of its partnership with USAID on behalf of the Aga Khan Development Network; and offer my own congratulations to His Highness the Aga Khan on completing his 50th year as the 49th hereditary Imam of the Ismaili Muslims.

USAID will continue to play a leadership role, and will work with all of you, as partners, in the effort to ensure economic prosperity where it is needed most.

Thank you.

Interim Assistant Secretary for Financial Stability Neel Kashkari Remarks at Brookings Institution

Interim Assistant Secretary for Financial Stability Neel Kashkari Remarks at Brookings Institution
Jan 08, 2009

Washington – Good afternoon. Thank you, Martin, for that kind introduction. I would also like to thank the Brookings Institution for hosting us today. I will provide a comprehensive update on the Treasury Department's progress in implementing the Troubled Asset Relief Program (TARP), and then spend some time taking questions from the audience and having a discussion.

We are in an unprecedented period and market events are moving rapidly and unpredictably. We at Treasury have responded quickly to adapt to events on the ground. Throughout the crisis, we have always acted with the following critical objectives in mind: one, to stabilize financial markets and reduce systemic risk; two, to support the housing market by avoiding preventable foreclosures and supporting mortgage finance; and three, to protect taxpayers. The authorities and flexibility granted to us by Congress have been essential to developing the programs necessary to meet these objectives.

A program as large and complex as the TARP would normally take many months or years to establish. But, we did not have the luxury of first building the operation, then designing our programs and then executing them. Given the severity of the financial crisis, we had to build the Office of Financial Stability, design our programs, and execute them - all at the same time. We have made remarkable progress since the President signed the law only 97 days ago.

Today, I will brief you about five areas. First, I will give an update on execution of the programs Treasury has implemented under the TARP. Second, I will review the progress we've made in building the Office of Financial Stability. Third, I will provide an update on our efforts to meet the highest standards for compliance and oversight. Fourth, I will review the thorough reporting requirements we continue to meet. Finally, I will update you on some of the measurements we look at to judge if our programs are working.

Update on TARP Programs

I will begin with the Capital Purchase Program (CPP). On October 14, Secretary Paulson announced that we would allocate $250 billion of the financial rescue package for a voluntary capital purchase program for healthy, viable banks of all sizes. The CPP was designed to first stabilize the financial system by increasing the capital in our banks, and then to restore confidence so credit could flow to our consumers and businesses.

People often ask: why are we investing in healthy banks? Shouldn't the TARP be used for failing banks? Healthy banks are in the best position to support their communities by extending credit. A dollar invested in a healthy bank is far more likely to be used to promote lending to creditworthy borrowers than a dollar invested in a failing bank, which would more likely use it to stay afloat.

It has been 86 days since Secretary Paulson announced the Capital Purchase Program. We started from scratch, recruited and built a world class team, designed the program details, hired necessary outside vendors, and implemented a complex, but efficient processing model. In that time, we have invested $178 billion in 214 institutions in 41 states across the country, as well as Puerto Rico.

There is a huge demand for the program: the number of applications under-review at the regulators is in the thousands, representing every state in the country, and hundreds more have already been pre-approved by Treasury. We are pleased with the large number of banks that have applied. The regulators are working diligently to get through their review and forward recommended applications to us as quickly as they can. We expect their review to continue over the next few months.

We continue to process applications quickly but carefully to ensure our program guidelines and goals are met. Our investment committee meets virtually every day to review applications as soon as they are sent to us by the regulators and we close transactions often within days of approval. In fact, we find that institutions need more time to complete their legal requirements than Treasury needs to execute the investments.

Our work will not let up until the last application has been reviewed and processed. Completing investments in more than 200 institutions across the nation in less than 90 days is a feat that I believe is unmatched in the public or private sectors. This progress is remarkable not only in its speed and quality, but also in its scope. We have reviewed applications from every state in the nation and touched almost every banking market with applications from small and large banks alike, including Community Development Financial Institutions. The largest investment under the CPP has been $25 billion and the smallest less than $2 million, with applications for upcoming investments of a few hundred thousand dollars.

Automotive Industry Financing Program

Next, I will discuss Treasury's actions under TARP to support the auto sector. While the TARP was designed to stabilize the financial sector, the legislation provided sufficiently broad authority to act to stabilize the domestic automotive industry. Absent congressional action, no other authority existed within the federal government to stave off a disorderly bankruptcy of one or more auto companies. Treasury was forced to act to prevent a significant disruption of the automotive industry that would pose a systemic risk to financial markets and negatively affect the real economy.

Last week, Treasury began funding transactions under this program. We funded our full commitment of a $4 billion loan to Chrysler, and we funded the first $4 billion of a $13.4 billion commitment to GM - the last $4 billion of which depends on future congressional action. The terms of these loans require the companies to move quickly to develop plans demonstrating long-term viability, and they also include significant taxpayer protection provisions.

Because the finance companies serve as the lifeblood of the automakers, we knew that our program would need to address the short-term needs of the auto finance companies as well. Last week, we funded a $5 billion investment in GMAC. We also committed to an additional $1 billion loan to GM to be used to participate in a rights offering at GMAC as part of its recapitalization in becoming a bank holding company.

These financings were designed to use our limited remaining resources to address the participating companies' short-term needs while providing them enough time to begin the hard work with all stakeholders that will be necessary to achieve viability.

Term Asset-Backed Securities Lending Facility

Support of the consumer finance sector is a high priority for Treasury because of its fundamental role in fueling economic growth. Like other forms of credit, affordable consumer credit depends on ready access to a liquid and affordable secondary market – in this case, the asset-backed credit market.
The Federal Reserve is setting-up a $200 billion program to support consumer finance securitization markets, specifically credit cards, auto loans, student loans and small business loans. Under the TARP, Treasury will provide $20 billion in this facility, which will enable a broad range of institutions to step up their lending and enable borrowers to have access to lower-cost consumer finance and small business loans. The facility may be expanded over time and eligible asset classes may be expanded later to include other assets, such as commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes. Treasury and the Federal Reserve continue to make progress in establishing this facility, which we expect to become operational in February.

Asset Guarantee Program

We established the Asset Guarantee Program under section 102 of the EESA. This program provides guarantees for assets held by systemically significant financial institutions that face a risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets. Treasury is exploring use of this program to address the $5 billion guarantee provisions of our recent agreement with Citigroup.

Targeted Investment Program

As part of our recent $20 billion investment in Citigroup, Treasury also established the Targeted Investment Program, the objective of which is to foster financial market stability. In an environment of high volatility and severe financial market strains, the loss of confidence in a major financial institution could result in significant market disruptions that threaten the financial strength of similar institutions. This investment in Citigroup includes important restrictions on executive compensation and corporate expenses as well as provisions to protect the taxpayers.

Building the Office of Financial Stability

Let me now turn to our work to establish the Office of Financial Stability. I mentioned that a program as large and complex as the TARP would normally take many months or years to establish. Given the severity of the financial crisis, we had to build the Office of Financial Stability, design our programs, and execute them - all at the same time.

Recruiting excellent people was the first and most important part of successfully establishing the office. We started by tapping the very best, seasoned, financial veterans from across the government and private sector to help launch the program. We were successful in quickly recruiting outstanding interim leaders for key positions in the office. In each case, the interim official was charged with: one, setting up the office; two, hiring permanent staff; three, operationalizing our programs; and, four, identifying their permanent successor. That process has worked extremely well.

Today we have almost 90 dedicated TARP staff, including full-time employees we have hired since the law was signed and experienced detailees we have recruited from across the government. In many cases, those detailees are choosing to become permanent members of the TARP team. This does not include the numerous main Treasury employees who are spending most of their time on TARP. We also have a robust pipeline of outstanding new people joining the team each week.

We have worked very hard to ensure the transition to the next Administration is smooth. The only political position within in the TARP is the Assistant Secretary position. Almost all of the remaining positions are being filled by people who are planning to remain with the program after the transition. The next Administration will inherit an Office of Financial Stability that is fully-staffed and executing extremely well. We have worked very hard to make sure there would be continuity so the program does not slow down. As I previously mentioned, we have many applications to process for the CPP over the next several months. We have made sure the team is in place to see that work through. We have also worked closely with the GSA to acquire dedicated space for the entire team. We moved in this past Monday and we expect the Special Inspector General will move to the same space in the next few weeks.

For a sense of the execution challenges this team has already successfully faced, consider that last week alone, our team closed $48 billion of transactions. We signed and funded over $15 billion in our Capital Purchase Program, a $20 billion investment in Citigroup, and a total of $13 billion to GMAC, GM and Chrysler.

Compliance and Oversight

I will now turn to oversight. Congressional committees of jurisdiction are the traditional bodies of oversight and Treasury has participated in five Congressional hearings on the TARP since the EESA was passed. In addition, the Congress established four additional avenues of oversight: one, the Financial Stability Oversight Board; two, the Special Inspector General; three, the Government Accountability Office; and four, the Congressional Oversight Panel. I will briefly review Treasury's interaction with each body.

First, we moved immediately to establish the Financial Stability Oversight Board, which is chaired by Federal Reserve Chairman Bernanke. The law requires the Board to meet once a month, but it has met multiple times since the law was signed, with numerous staff calls between meetings. We have also posted the bylaws and minutes of the Board meetings on Treasury's website.

Second, the law also requires appointment of a Senate-confirmed Special Inspector General to oversee the program. We welcome the Senate's confirmation of Neil Barofsky as the Special Inspector General. I meet weekly with the Inspector General and our staffs meet regularly.

Third, the law calls for the Government Accountability Office to establish a physical presence at Treasury to monitor the program. Treasury provided workspace for our auditors within days of the President signing the law. I have participated in multiple briefings with the GAO and our respective staffs are meeting almost daily for program updates and to review contracts.

Finally, the law called for the establishment of a Congressional Oversight Panel to review the TARP. That Oversight Panel was recently formed and we had our first meeting on Friday, November 21 and our second meeting on Thursday, December 18. The Congressional Oversight Panel posed a number of questions to Treasury and we provided a detail response which we published on our website on December 31.

Reporting and Transparency

Next, I will discuss reporting requirements and transparency. Reporting results to Congress and the American people is a critical responsibility of the TARP. People need to see what we are doing, understand why we are doing it, and know the effects of our actions. The law defined numerous reporting requirements for the TARP, which I will briefly review here. Treasury has met all of our reporting requirements on time, and will continue to do so. All of our reports are posted on the Treasury website.

  • First, the law requires Treasury to publish a Transaction Report within two business days of completing each TARP transaction. We have published eleven transaction reports so far.
  • Second, the law requires Treasury to publish a Tranche Report to Congress within seven days of each $50 billion commitment that is made. To date, Treasury has published four Tranche Reports, including one this week.
  • Finally, the law requires Treasury to provide a detailed report on the overall program within 60 days of the first exercise of the TARP purchase authority and then monthly thereafter. We have published two such reports so far, the most recent this week.

Measuring Results

Finally, I will address the important issue of measuring the results of our programs. People often ask: how do we know our programs are working? The most important evidence that our strategy is working is that we have stemmed a series of financial institution failures. The financial system is fundamentally more stable than it was when Congress passed the legislation. While it is difficult to isolate one program's effects given policymakers' numerous actions, one indicator that points to reduced risk of default among financial institutions is the average credit default swap spread for the eight largest U.S. banks, which has declined by about 275 basis points since before Congress passed the EESA. Another key indicator of perceived risk is the spread between LIBOR and OIS: 1-month and 3-month LIBOR-OIS spreads have declined about 202 and 147 basis points, respectively, since the law was signed and about 312 and 242 basis points, respectively, from their peak levels before the CPP was announced.

People also ask: when will we see banks making new loans? It is important to note that almost $75 of the $250 billion CPP has yet to be received by the banks. Treasury is executing at a rapid speed, but it will take some time to review and fund all the remaining applications. This capital needs to get into the system before it can have the desired effect. In addition, we are still at a point of low confidence – both due to the financial crisis and the economic downturn. As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, Treasury expects to see more credit extended.

People have then asked: how will you track lending activity? Treasury has been working with the banking regulators to design a program to measure the lending activities of banks that have received TARP capital. We plan to use quarterly call report data to study changes in the balance sheets and intermediation activities of institutions we have invested in and compare their activities to a comparable set of institutions that have not received TARP capital investments. Because call report data is infrequent, we also plan to augment that analysis with a selection of data we plan to collect monthly from the largest banks we have invested in for a more frequent snapshot.

The increased lending that is vital to our economy will not materialize as fast as any of us would like, but it will happen much faster as a result of deploying resources from the TARP to stabilize the system and increase capital in our banks.


While we have made significant progress, we recognize challenges lie ahead. As Secretary Paulson has said, there is no single action the federal government can take to end the financial market turmoil and the economic downturn, but the authorities Congress provided last fall dramatically expanded the tools available to address the needs of our system. We are confident that we are pursuing the right strategy to stabilize the financial system and support the flow of credit to our economy. We have worked around the clock to build the Office of Financial Stability, design our programs, and execute them and will hand the next Administration a program that is staffed and fully operational. Thank you and I would be happy to take your questions.

US: New Ethiopian Law Restricts NGO Activities

New Ethiopian Law Restricts NGO Activities
Press Statement
US State Dept, Robert Wood, Deputy Spokesman
Washington, DC, January 8, 2009

The United States is concerned that the Charities and Societies Proclamation (CSO law) passed this week by the Ethiopian Parliament appears to restrict civil society activities and international partners’ ability to support Ethiopia’s own development efforts.

We recognize the importance of effective oversight of civil society organizations to ensure accountability, efficiency, transparency, and a clear set of operating procedures for NGOs. However, we are concerned this law may restrict U.S. government assistance to Ethiopia, particularly on promoting democracy and good governance, civic and human rights, conflict resolution, and advocacy for society’s most vulnerable groups -- areas the Ethiopian government has defined as critical for development.


In Cato: William G Harding fighting economic depression

Not-So-Great Depression, by Jim Powell
Cato, Jan 08, 2009


Which U.S. president ranks as America's greatest depression fighter?

Not the fabled Franklin Delano Roosevelt, since unemployment averaged 17 percent through the New Deal period (1933–1940). What banished high unemployment was the conscription of 12 million men into the armed forces during World War II. FDR actually prolonged high unemployment: he tripled taxes; he signed laws that made it more expensive for employers to hire people, made discounting illegal, and authorized the destruction of food; and he launched costly infrastructure projects like the Tennessee Valley Authority that became a drag on states receiving TVA-subsidized electricity.

America's greatest depression fighter was Warren Gamaliel Harding. An Ohio senator when he was elected president in 1920, he followed the much praised Woodrow Wilson— who had brought America into World War I, built up huge federal bureaucracies, imprisoned dissenters, and incurred $25 billion of debt.

Harding inherited Wilson's mess— in particular, a post–World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit. The estimated gross national product plunged 24 percent from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million to 4.9 million.

Harding had a much better understanding of how an economy works than FDR. As historian Robert K. Murray wrote in The Harding Era, the man who would become our 29th president "always decried high taxes, government waste, and excessive governmental interference in the private sector of the economy. In February 1920, shortly after announcing his candidacy, he advocated a cut in government expenditures and stated that government ought to 'strike the shackles from industry. . . . We need vastly more freedom than we do regulation.' "

One of Harding's campaign slogans was "less government in business," and it served him well. Harding embraced the advice of Treasury Secretary Andrew Mellon and called for tax cuts in his first message to Congress on April 12, 1921. The highest taxes, on corporate revenues and "excess" profits, were to be cut. Personal income taxes were to be left as is, with a top rate of 8 percent of incomes above $4,000. Harding recognized the crucial importance of encouraging the investment that is essential for growth and jobs, something that FDR never did.

Powerful senators, however, favored giving bonuses to veterans, as 38 states had done. But such spending increases would have put upward pressure on taxes. On July 12, 1921, Harding went to the Senate and urged tax and spending cuts. He noted that a half-billion dollars in compensation and insurance claims were already being paid to 813,442 veterans, and 107,824 veterans were enrolled in government-sponsored vocational training programs.

In 1922, the House passed a veterans' bonus bill 333-70, without saying how the bonuses would be funded. The senate passed it 35-17. Despite intense lobbying from the American Legion, Harding vetoed the bill on September 19— just six weeks before congressional elections, when presidents generally throw goodies at voters. Harding said it was unfair to add to the burdens of 110 million taxpayers.

Harding's Secretary of Commerce Herbert Hoover wanted government intervention in the economy— which as president he was to pursue when he faced the Great Depression a decade later— but Harding would have none of it. He insisted that relief measures were a local responsibility.

Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes fell from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922. Harding's policies started a trend. The low point for federal taxes was reached in 1924; for federal spending, in1925. The federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930.

Conspicuously absent was the business-bashing that became a hallmark of FDR's speeches. Absent, too, were New Deal-type big government programs to make it more expensive for employers to hire people, to force prices above market levels, or to promote cartels and monopolies.

With Harding's tax and spending cuts and relatively non-interventionist economic policy, GNP rebounded to $74.1 billion in 1922. The number of unemployed fell to 2.8 million— a reported 6.7 percent of the labor force— in 1922. So, just a year and a half after Harding became president, the Roaring Twenties were underway. The unemployment rate continued to decline, reaching an extraordinary low of 1.8 percent in 1926. Since then, the unemployment rate has been lower only once in wartime (1944), and never in peacetime.

The Roaring Twenties were a time of unprecedented prosperity. GNP expanded year after year without inflation. Productivity improved, and real wages increased. The stock market tripled. There was a dramatic expansion of the middle class. The Great Migration occurred during the 1920s, with some 7 million African-Americans moving north for better schools and job opportunities. Women had the vote. Millions of Americans began to buy cars, originally a luxury of the rich. People bought radios that enabled ordinary people to hear the finest entertainers in their own homes. Movies became popular. Frozen food made possible a more varied diet year-round. Doctors developed new medicines to fight deadly diseases like diphtheria and tuberculosis.

While Harding can hardly be considered a champion of laissez-faire economics (he supported tariffs, after all), the pro-growth policies he implemented are directly responsible for the astonishingly rapid growth in prosperity— and widely shared prosperity— America enjoyed throughout the Roaring 20s.

Unfortunately, Harding's stunning success as a depression fighter was overshadowed by the Teapot Dome scandal that engulfed his administration after his death in August 1923. This resulted from "progressive" era conservation policies in which the government owned land known to have petroleum reserves— at Teapot Dome, Wyoming, and Elk Hills, California. Since the beginnings of recorded history, government involvement in the economy has led to corruption, and Secretary of the Interior Albert Fall accepted bribes for leases enabling private companies to extract the oil. There wouldn't have been a scandal if the reserves had been privatized, as more than 250 million acres of government land had been privatized during the previous century.


Sec Paulson on The Role of the GSEs in Supporting the Housing Recovery before the Economic Club of Washington

Remarks by Treasury Secretary Henry M. Paulson, Jr. on The Role of the GSEs in Supporting the Housing Recovery before the Economic Club of Washington
Treasury Dept, January 7, 2009

Washington – Good afternoon. Thank you, David and thanks to the Washington Economic Club for this opportunity to provide my thoughts on long-term reform of the housing Government Sponsored Enterprises, the GSEs, Fannie Mae and Freddie Mac.

Debate over the role and function of these entities has raged for years. Congress established Fannie and Freddie decades ago to meet a public policy goal – to increase the funding available for home mortgage financing. The GSEs achieve this through providing liquidity to the secondary market for a limited range of home mortgages, either through credit guarantees on mortgage-backed securities (MBS) or by directly investing in mortgages and mortgage-related securities through their retained mortgage portfolios. To further this mission, their congressional charters grant the GSEs several benefits which together created a perception that the GSEs were backed by the U.S. government, even though this was not the case. This "implicit" government guarantee provided the GSEs with a funding advantage over other mortgage market participants.

The inherent conflict in this structure is obvious – the GSEs served both a public mission and private shareholders – they received public support but operated for private shareholder gain. While policymakers of every ideological stripe have acknowledged the risks created by this conflict, entrenched debate, often with little recognition of market realities, prevented reform. Over time, the GSEs' advantages enabled them to grow at a phenomenal pace, so that today they have $5.4 trillion in obligations outstanding, held by investors in the U.S. and around the world. As a comparison, that is almost 40 percent the size of the entire $14 trillion U.S. economy. The systemic risk posed by such size was heightened by the fact that investors assumed that GSE securities were backed by the U.S. government and therefore virtually risk-free, despite repeated statements by consecutive U.S. administrations to the contrary. These debt-holders would be the largest, but not the only, conduits of systemic impact should either GSE fail. Derivative counterparties, for example, would also be overwhelmed by a default of either GSE.

For some time market participants had questioned whether the GSEs were adequately capitalized for the risk they were taking, and therefore able to withstand losses without triggering a systemic event. Policymakers acknowledged that the GSE regulator did not have the authorities to address these risks, yet they could not reach consensus to improve it, and instead left a clearly inadequate regulatory structure in place. When I came to Washington, I saw an opportunity to improve the regulatory structure, even if it wouldn't be perfect. I set to work in the fall of 2006 to broker progress in the House, and we did begin to solve some of the seemingly intractable differences.

Even as Washington debated GSE oversight, there was little debate over the extent to which government should subsidize homeownership, and whether such government support was contributing to a housing bubble. The U.S. government has many policies that subsidize homeownership – it would be oversimplifying and wrong to blame Fannie and Freddie for the bubble, but they clearly are part of the public policy bias that contributed to it.

In sum, the GSE reform debate was largely frozen in place, or moving at glacial speed. Then suddenly, the unprecedented housing correction shifted the ground under that debate and forced action.

Today I will review the actions we have taken and their effect, and address two issues before us. First, in the short-term, how do we use the GSEs to mitigate the current credit crisis and housing downturn? Second, given the temporary nature of their current status, how might we address the appropriate long-term structure?

Prelude to Recent Actions Regarding Fannie Mae and Freddie Mac

As we progressed through the current housing market downturn, investors fled mortgages that carried any credit risk. But because the GSEs take the credit risk on the mortgages they guarantee and because investors believed there was implicit government backing, the conforming loan market continued to function relatively well. As a result, the GSE share of new mortgage business rose from 46 percent in the second quarter of 2007 to 84 percent in the second quarter of 2008. Without the GSEs to finance mortgages, it was very clear that mortgage finance would essentially dry up.

However, as the extraordinary housing correction deepened, weaknesses in these entities became apparent. In July 2008, investors lost confidence as they became increasingly uncertain about Fannie and Freddie's capital position. The GSEs' already depressed stock prices plummeted further. Shareholder losses did not pose a public policy concern, but the share price drop further weakened confidence among the holders of the $5.4 trillion of GSE debt and MBS. Investors at home and abroad were reducing purchases and even selling from their holdings of GSE debt. The consequences of either GSE failing would be catastrophic. We couldn't wait for a failure; we had to act preemptively to shore up confidence in these enterprises.

In July, I requested that Congress quickly complete work on long-sought GSE regulatory reform and also provide Treasury with expanded authority to support Fannie, Freddie and the Federal Home Loan Banks. Congress did so – giving us enormous temporary authorities to inject capital if the GSEs asked for it, and to create a back up liquidity facility for GSE debt.

Immediately after passage of the legislation, in coordination with the Federal Reserve, the newly-constituted GSE regulator, FHFA, and our advisor Morgan Stanley, we began a comprehensive financial review of the GSEs. At the same time, mortgage market conditions continued to deteriorate. Negative earnings announcements by Fannie and Freddie in August reflected those worsening conditions, and further roiled markets. Neither company appeared to have any reasonable prospect of raising private capital to allay those concerns in the foreseeable future, and our examination found capital to be inadequate – in terms of both the quality of capital and the embedded losses stemming from worsening mortgage market conditions.

Confidence in the GSE model was largely shattered. It was clear to me that simply injecting even a great deal of equity into their business model would not create the market confidence necessary to fund these enterprises going forward and to bolster confidence in the $5.4 trillion of extant GSE obligations, which posed the greatest systemic risk. Market fragility and the GSEs' deteriorating balance sheets required that we take responsibility for the GSE structural ambiguities that U.S. policymakers had let fester for decades. If we had asked Congress for, and received, the power to explicitly guarantee the GSEs' obligations, we would have done so. But without that authority, we had to be creative and find a way to effectively guarantee the GSEs' obligations.

We had to stabilize the situation immediately. We knew that markets were exceptionally fragile and would be further threatened in September when we expected that a number of large financial institutions, including Lehman Brothers, would post disappointing earnings. Chairman Bernanke, FHFA Director Lockhart and I met almost daily, over a 10 day period, to work toward a comprehensive action plan. As I made clear at the time, we sought a temporary solution that would achieve three goals: (1) stabilize markets, (2) promote mortgage availability, and (3) protect the taxpayer.

In comprehensive action taken on September 7th, FHFA placed Fannie and Freddie into conservatorship, enabling Treasury to take creative steps to support their obligations. We moved quickly to do what was necessary. Our actions would have been impossible to implement were it not for the GSE reform legislation that gave FHFA the expanded power to make qualitative and quantitative judgments about capital and also gave Treasury the financial authorities necessary to make conservatorship a stabilizing, as opposed to a destabilizing, event. We devised Preferred Stock Purchase Agreements to effectively guarantee the GSEs' obligations by ensuring Fannie and Freddie would maintain a positive net worth. This commitment ensures that they can fulfill their financial obligations, even after the temporary authorities expire in December 2009. Additionally, Treasury established a new secured lending credit facility intended to serve as an ultimate liquidity backstop. To further support the availability of mortgage financing, Treasury initiated a program to purchase GSE MBS and has purchased over $50 billion thus far.

We took these actions first, to avert the financial market meltdown that would ensue from the collapse of these institutions and, second, to allow the GSEs to continue, in the midst of overall market stress, to perform their essential role of providing mortgage finance. This conservatorship, with the explicit backing of the federal government, is temporary and must be resolved for the long-term. In the meantime, the GSEs must serve the taxpayers' interest by assisting in turning the corner on the housing correction, which is critical to return normalcy to the capital markets and resume U.S. economic growth. The GSEs can facilitate progress through the housing correction by keeping mortgage rates low and by mitigating foreclosures.

Keeping Mortgage Rates Low

Lower mortgage rates enable more potential homebuyers to return to the market and help put a floor under home prices. Initially, following our September actions, mortgage rates did fall. Market turmoil subsequently increased and mortgage rates rose, but not nearly as much as the cost of other forms of credit. Still, neither the taxpayers nor the economy were getting the full benefit of the agreements put in place to effectively guarantee GSE debt. We could have gone back to Congress to ask for authority to directly guarantee GSE debt, however this would have been difficult to achieve. While a simple, direct government guarantee of GSE MBS might have reduced rates further – given the extraordinary strains in today's markets it probably would still have failed to produce all of the desired mortgage rate reductions. Therefore, we examined other means of deploying our authorities that could reduce mortgage rates.

We immediately noted that, given the effective government guarantee and the spread between Treasury rates and those of the GSEs, the taxpayers would profit if the government simply issued Treasuries to buy GSE securities. And in fact, we have funded the purchase of GSE securities with the issuance of Treasury bonds. But to make an impact on mortgage rates, such an initiative would have to be very large and those Treasury issuances would count against the debt limit.

On November 25, the Federal Reserve announced a new program to purchase up to $100 billion in GSE debt securities and $500 billion in GSE MBS. This Federal Reserve program had a significant impact. The 30-year fixed rate has fallen from an average of 6.04 percent the week before the policy was announced to a record low 5.10 percent last week, accomplishing a vitally important step in addressing this housing correction – lower mortgage rates that may bring additional credit-worthy buyers into the housing market.

Foreclosure Mitigation Efforts

While the GSEs are in this temporary form, we have also worked to increase their impact on foreclosure mitigation. In November, FHFA, the GSEs, Treasury and the HOPE NOW Alliance announced a major streamlined loan modification program (SMP) to move struggling homeowners into affordable mortgages. The new protocol relies heavily on the "IndyMac model" developed by the FDIC and creates sustainable monthly mortgage payments by targeting a benchmark ratio of housing payments to monthly gross income. Together with the IndyMac/FDIC protocol, the SMP creates a powerful new model that should help ensure that no borrower who wants to stay in their home and can make a reasonable monthly payment will fall into foreclosure.

The SMP will directly and immediately apply to the 50 percent of homeowners with loans serviced under the GSEs' auspices. Fannie and Freddie announced that they would suspend foreclosure sales and cease evictions of owner-occupied homes until January 9th to allow time for implementation of the modification program. The timing of this initiative is especially important as prime loans now account for almost 50 percent of new delinquencies, and delinquencies are increasingly the result of overall economic factors rather than the loan features and underwriting practices associated with Alt-A and subprime products.

And the impact of the SMP will go much further. The vast majority of servicing contracts for non-GSE mortgages reference the GSEs' practices, and we therefore expect the SMP to be widely adopted and quickly move hundreds of thousands of struggling borrowers into sustainable, affordable mortgages. Further, this streamlined protocol frees up servicing industry resources that can be redirected to providing case-by-case assistance to more difficult cases that fall outside the SMP protocol.

Impact of Temporary Authorities to Stabilize the GSEs

Given the authority granted by Congress last summer, we have gone about as far as we can to avert systemic risk and to use the GSEs to speed progress through the housing correction that lies at the heart of our economic downturn. Although the effective guarantee of GSE debt and MBS has brought some degree of stabilization, it is not the most efficient way to remove the ambiguity inherent in the GSE structure, even temporarily.

To the extent that the Congress and the next Administration wish to use the GSEs as a tool to further reduce mortgage rates, they could, under existing authorities, make large purchases of mortgages made at a target rate of, say, 4 percent – although very large volumes of Treasury issuances would be required for such a program to be effective. A targeted program such as one that purchases only new mortgages made for home purchases, as opposed to refinancing, for a one year period would require less but still substantial funding. Separately, the next Administration could pursue legislative authority to directly guarantee GSE debt for the remainder of the conservatorship period.

Long-Term Policy Recommendations

The GSEs are playing a necessary role supporting the mortgage availability which is essential to eventually turning the corner on the housing correction, reducing the stress in our capital markets and returning to growth in our economy. This must continue to be our first priority. But we will make a grave error if we don't use this period to decide what role government in general, and these entities in particular, should play in the housing market.

The public debate over the long-term structure of the GSEs is dramatically changed today – no one any longer doubts the systemic risk these entities posed. It is clear to all conservatorship is a temporary form, and that returning the GSEs to their pre-conservatorship form is not an option.

The debate about the future of Fannie and Freddie requires answering the much larger and more important question of the federal government's role in the mortgage market and in housing policy, generally. Given the bubble we have experienced, policymakers must ask what amount of homeownership subsidies are appropriate. Numerous long-standing indirect subsidies already exist, including the mortgage interest deduction, subsidized FHA mortgages, and the variety of other HUD programs that expand homeownership opportunities.

Is that enough? Or should government also reduce mortgage rates for a larger group of homebuyers? Policymakers must decide if the GSE subsidy is a public policy priority. If the GSEs are to play a role, then, the debate is clearly framed: Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. Any middle ground is a recipe for another crisis. Although there are strong differences of opinion over the government's role in supporting housing, under any course policymakers choose, there are structures and choices that can resolve the long-term conflict of purposes issues.

And it is clear that to protect against systemic risk in the future, the GSEs should be constituted with a portfolio no larger than what is minimally necessary for warehousing purposes. Without portfolios of significant size, the enterprises' management of interest rate risk would remain a vital function for the safety and soundness of the enterprises, but would no longer present the same potential systemic risk.

As a public policy tool to expand homeownership, the GSEs, like FHA-Ginnie Mae, reduce mortgage rates for borrowers by taking on the credit risk that mortgage investors would otherwise bear and guaranteeing that mortgage investors will be paid in full should the mortgage borrower default. As Congress considers the future role and structure of the GSEs, it must consider how much credit risk the Federal government should take.

Addressing Credit Risk

In today's stressed mortgage market, between FHA-Ginnie Mae, Fannie Mae, and Freddie Mac, almost all new mortgage market originations have federal government credit support. This is not sustainable over the long-run. It will lead to inefficiency, less innovation and higher costs. It also contradicts basic U.S. market principles. We must have some degree of private sector involvement in the evaluation of credit risk if we are going to have a mortgage market that allocates resources with efficiency.

In the mortgage market of the future, I clearly see a role for the FHA and Ginnie Mae for first-time and low income homebuyers. Beyond the explicit guarantee provided to FHA and Ginnie Mae policymakers must decide how much to further subsidize mortgage credit risk, if at all, and must decide the role of private capital in any subsidy plan. Depending on the degree of subsidy policymakers choose, there are a variety of options for structures to replace the GSEs, including:

(1) Expanded FHA/Ginnie Mae. Some advocate that beyond the current credit crisis the U.S. government's long-term policy should make the implicit, explicit. Explicitly guaranteeing Fannie and Freddie's obligations would essentially nationalize this significant portion of the U.S. housing finance market. Under this model, the GSEs could become a government entity, or their functions could be absorbed by FHA/Ginnie Mae . In either case, the GSEs would no longer have private shareholders. The size of the eligible population of homebuyers would determine how large a share of mortgage credit exposure the government would own.

I view the permanent nationalization of the GSEs, essentially expanding the role of FHA and Ginnie Mae, as a less-than optimal model. While it offers the perceived advantage of explicit government support, it eliminates the necessary private sector evaluations of credit risk and the private market stimulus to innovation.

(2) Partial Guarantee. A hybrid of this would be to create a Ginnie Mae-like entity for non-FHA mortgages, structured as a partial guarantee mechanism. The new entity could operate on a similar basis as Ginnie Mae, but provide only partial guarantees for MBS. Investors would then have a floor under potential MBS losses, but would still evaluate the credit risk associated with individual issuers. While such a hybrid program would clearly define the extent of the government's guarantee, developing risk sharing parameters compatible with profit incentives would be as problematic, and potentially as inefficient, as in the current GSE structure.

(3) Privatization. A third alternative would be to remove all direct or indirect government support, completely privatizing these companies while breaking them up to minimize systemic risk. As appealing as this alternative sounds, it is difficult to envision a sound, practical, private sector mortgage insurance business of any significant size that does not require large amounts of capital, and consequently generates only a modest return on capital. The recent problems encountered by monoline insurers, which ventured into guaranteeing mortgage product as well as the experience of the GSEs, underscores this point. Moreover, a break up scenario does not look particularly promising, as reverse economies of scale would take hold. It is also worth noting that a regional mortgage insurer would lack diversity as a risk mitigant. Perhaps a consortium of banks would find it advantageous to own a national mortgage insurer to wrap their product, or some other good private sector business model may emerge. But I am skeptical that the "break it up and privatize it" option will prove to be a robust or even viable model of any substantial scale, without some sort of government support or protection. However, should policymakers choose to scale back public policy bias toward homeownership, we will eventually find out what business model the free market would support.

(4) Housing Utility. Finally, given traditional U.S. public policy support for marshalling private capital to expand homeownership, establishing a public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict between public purpose and private gain. Under a utility model, Congress would replace Fannie Mae and Freddie Mac with one or two private sector entities. The entities would purchase and securitize mortgages with a credit guarantee backed by the federal government, and would not have investment portfolios. These entities would be privately-owned, but governed by a rate setting commission that would establish a targeted rate of return, thereby addressing the inherent conflicts between private ownership and public purpose that are unresolved in the current GSE structure. This commission would also approve mortgage product and underwriting innovations to continually improve the availability of mortgage finance for a population to be defined by the Congress. In this model, continued safety and soundness regulation would be essential.

Need to Support Vibrant Private Market

If we are to maintain a private-sector secondary mortgage market – which I believe serves the taxpayer and the homebuyer equally well – then we must enhance the ability of depository institutions to fund mortgages, either as competitors to a newly-established government structure or as a substitute for government funding. One way to do this is for the government to receive some compensation for its guarantee. The current GSE Preferred Stock Purchase Agreements take a small step in this direction, in that as of 2010 the GSEs must pay the government a fee for the taxpayer backstop on their guarantees. Of course, if this rate perfectly reflected the risk versus the cost of the guarantee, there would be no subsidy to mortgage availability. It is obviously inherently difficult to reach an exactly correct price, yet a long-term fee-like structure in exchange for explicit government backing would help to reduce advantages over private institutions. Over time, another approach might be to offer other financial institutions the opportunity to pay a fee for government backing on securitized, conforming loans, a structural transformation that would lower entry barriers, and increase competition and innovation in housing finance.

Covered bonds are another private sector alternative worth exploring. The FDIC has made regulatory changes to support the emergence of covered bonds, which could provide enhanced opportunities for depository institutions to fund and manage mortgage credit risk. There is strong interest in developing a U.S. covered bond market, but we will have to work through the credit crisis before a new market is likely to take hold. Some have advocated dedicated covered bond legislation, which could be helpful to establishing this market, and should be considered in the context of broader housing finance reforms.

Additionally, the President's Working Group on Financial Markets has recommended extensive reforms in the mortgage securitization process by investors, ratings agencies, underwriters and regulators, especially with respect to mortgage origination oversight. When these reforms are in place, we expect private label securitization to return with greater oversight and market discipline.


My thoughts today are intended to inform the necessary debate over the future structure of the housing GSEs. By allowing the GSE structural ambiguities to persist for too long, U.S. policymakers have created an untenable situation. Today, Fannie Mae and Freddie Mac are in a temporary form that, while stable, cannot efficiently serve their Congressionally-chartered mission and protect the taxpayers' investment over the long-term. We took the right actions to meet a specific need at a specific time.

The GSEs are critical to getting us through this current period, and this is our first priority. More may need to be done to clarify and simplify their structure and to increase their effectiveness in curbing further housing price correction. But we cannot look only at this short-term need; policymakers must resolve the question of long-term structure because the pre-conservatorship model has been disproven.

The first step must be for policymakers to decide – in light of the recent housing bubble and the severe financial and economic penalty it has imposed on our nation – the role government should play in supporting home ownership. We cannot allow a repeat of the devastation this housing correction has wreaked on families and communities across the United States. Once that decision is made, the GSEs should be restructured to meet that public policy choice and satisfy three objectives: First, there must be no ambiguity as to government backing. It must be explicit or non-existent. Second, there must be a clear means of managing the conflict between public support and private profit. Third, there must be strong regulatory oversight of the resulting institutions.

As I have outlined, whatever role the U.S. government chooses to play in subsidizing mortgage finance, there is a structure that can meet the objectives. With the knowledge of recent experience, we have a responsibility to begin work now on a long-term GSE structure which avoids the dangerous mix of policy and market distortions created by the former flawed GSE model. Thank you.

D.C. libertarians plot their Obama administration strategies

Beat the New Boss. By David Weigel
D.C. libertarians plot their Obama administration strategies.
Reason, January 2009

Four years ago, after the re-election of George W. Bush, the Permanent Republican Majority had finally taken over. Grover Norquist of Americans for Tax Reform predicted that the Democrats would not even survive four more years. “Without effective control of the government, the Democratic Party is like a fish out of water,” Norquist said at the time, “a vampire in the sun, Antaeus held aloft, an appliance unplugged.”

But the Democrats survived. In fact, they came back faster than all but the most optimistic liberals expected. In January 2009, they are returning to Washington stronger than at any time since the Great Society Congress of 1965-67.

Washington's libertarian activists and think tankers are still trying to wrap their brains around the new reality. Today you can sort them into two rough categories. There are the Bargainers, the ones who believe they can do business with President Barack Obama. And there are the Battlers, the ones who believe Obama can-and should-be impeded while the Republican Party is rebuilt into a genuinely liberty-minded organization.

"The upside of the Obama victory," says Matt Kibbe, president of the pro-market group FreedomWorks, "is that it draws, more clearly, the lines between the good guys and the bad guys. It gives us an especially good idea of who the bad guys are." I.e., the new administration.

A D.C. libertarian's status as a Bargainer or a Battler largely depends on what issue he or she works on every day. Economic libertarians such as Kibbe, the people who spent the Bush era pushing unsuccessfully for market-based health care reform and private Social Security accounts, expect four to eight years in an even deeper wilderness. "I watched the Social Security campaign unravel from the inside," Kibbe remembers. Now there will be no "inside."

Obama has some advisers who sympathize with libertarians, many of whom he befriended at Harvard and the University of Chicago. These include Jeff Liebman, one of Obama's top economic advisers, who has been attacked by liberals for statements supporting Social Security privatization and tax cuts. "I know Jeff Liebman well," says Michael Tanner, a Cato Institute analyst who fought for private Social Security accounts in 2005, but "Obama ran a campaign that precludes Social Security reform."

The Battlers are not necessarily apocalyptic. A Democratic victory has been predicted for so long that they grew acclimated to the idea. Gallows-humor jokes about the Obama presidency were part of the city's conversation for months before the election. But in the closing weeks the news just got worse and worse.

A Democratic Congress became a Democratic majority of at least 254 seats in the House and 57 seats in the Senate. A financial crisis triggered a $700 billion bailout and widespread nationalization of the banking sector, engineered by Republicans. Some form of national health insurance seemed increasingly likely as the political terrain grew more favorable. The ailing Sen. Edward Kennedy (D-Mass.) has made it clear that he wants a health care bill-"the cause of my life"-to pass.

"We'll all have to suffer for him," says Tanner. "In Egypt, didn't they bury the pharaohs with their slaves?"

The Battlers' fear is tempered by their dismal experiences with Bush. The 43rd president's second term began with Republican majorities in both houses of Congress, but a post-election push toward the long-held libertarian dream of privatizing Social Security was nearly dead on arrival. As worried as he is about Obama, Tanner now admits that he was "dead wrong about Bush." White House staff members "met with us but didn't listen," he says. "A lot of meetings were held just to soothe us. The Clinton administration, whether you believe it or not, treated us better."

Myron Ebell, an environmental analyst at the pro-market Competitive Enterprise Institute, had an even tougher time with the Bush White House. "We won't have allies in the Obama administration," he says, "but we didn't have allies in the Bush administration either. Look at Christine Todd Whitman at the EPA. [Former Energy Secretary] Spencer Abraham didn't know much about energy. [Former Treasury Secretary] Paul O'Neill supported cap and trade [a plan to raise emissions standards while offering companies tradeable emissions credits], and so does [Treasury Secretary] Hank Paulson." While Ebell expects worse from Obama, he feared the possibility of a John McCain presidency even more.

Other libertarians, including many Bargainers, never even went through a period of expecting anything from the Bush White House. Chief among them are anti-drug war activists. The Marijuana Policy Project (MPP), which spent both the Clinton and Bush years in a defensive crouch, is cautiously optimistic about the Obama administration.

"Obama has spoken out about ending DEA meddling in states where some marijuana use is legal," MPP President Rob Kampia says. "The generic Democratic member of Congress is better on our issues than the generic Republican member of Congress. Look at the votes on our bills."

Kampia has been burned before. Both Clinton and Bush reportedly experimented with drugs, but both became fierce drug warriors. "What makes Obama better than them," Kampia says, "is that he's not a liar. He hasn't lied about his personal use, or his stance on DEA raids. He's shown intellectual honesty about issues, while other politicians squirmed away, to their detriment."

Roger Clegg, president and general counsel of the Center for Equal Opportunity, is not himself a libertarian, but he litigates for one of the issues many conservatives and libertarians still agree on: ending government-mandated racial preferences. He has successes to point to from the Bush years. The 2003 Supreme Court cases Gratz v. Bollinger and Grutter v. Bollinger narrowed the scope of preferences, and the addition of Samuel Alito to the high court increased its skepticism on this count. In Clegg's view, Obama can actually do what Bush and his Justice Department never dared to: attack the underpinnings of affirmative action itself.

"I can imagine a Nixon-goes-to-China moment on racial preferences," Clegg says. "The very fact that Americans have elected a black president should raise serious questions among the people who supported race preferences in the past as to what extent they can still be defended." Clegg points out that Obama has said his daughters are so privileged now that they shouldn't benefit from affirmative action.

Jameel Jaffer spent considerably more time than Clegg fighting the Bush administration. The director of the American Civil Liberties Union's National Security Project and the lead plaintiffs' counsel in the national security letter case Doe v. Ashcroft and several other abuse-of-power lawsuits, Jaffer has spent his legal career trying to roll back executive power. He is not yet sure of what to expect from Obama.

"No president is going to be as eager to wield the power that Bush arrogated to the executive branch," Jaffer says. "Executive unilateralism was a signature idea of his administration." The problem is that Obama isn't so easy to read. After saying he'd vote against it, he voted for a bill that legalized warrantless monitoring of international communications involving people in the United States, previously prohibited by the Foreign Intelligence Surveillance Act. "It was by far the most sweeping surveillance statute enacted by the Democratic Congress," Jaffer says. "We think it's unconstitutional. I hope a lot of leaders come to recognize that they made a mistake."

With the Bush administration ending in a frenzy of disappointment, most libertarians don't expect much more luck with Obama, outside of a few issues involving drug policy and executive power. The debate in Washington now is on how much effort to spend trying to remake the Republican Party. "We're fighting for the soul of the GOP," says Tanner, who adds that libertarians need to look beyond the party, at other reformers, other populists, people who won over Americans as much as Bush has lost them. "We need to seize that Ross Perot mantle of fighting against these guys."

Ozawa and Obama

Ozawa and Obama. By Michael Auslin
The likely success of the Democratic Party of Japan in this year's general election could mark a new era in Japanese politics and have a significant impact on the Obama administration's relations with its closest Asian ally.

Wall Street Journal Asia, January 6, 2009

After seeming to get back on track earlier this decade, Japan once more faces a host of intractable problems, from a paralyzed political system to an economy again officially in recession. Like its American counterpart, the Japanese electorate wants change, and the likely success of the Democratic Party of Japan in this year's general election could mark a new era in Japanese politics and the end of over half a century of Liberal Democratic Party rule. A DPJ government will not only lead to new policies, but may have a significant impact on the Obama administration's relations with its closest Asian ally.

For over two years now, the LDP has been unable to resolve Japan's economic and political challenges. Having lost control of the Upper House of Parliament in 2007, and on its third prime minister in as many years, the LDP will be hard-pressed to retain its majority in the powerful Lower House. An election must be scheduled no later than September, but with current Prime Minister Taro Aso's popularity in the 20% range, the LDP might be forced to call elections earlier, and an electoral defeat could lead to its dissolution. Should the LDP manage to keep a majority in the Lower House, the current political deadlock will continue, with the two parties splitting control of Parliament and unable to agree on any but the most basic legislation. This would paralyze most of Japan's foreign and domestic initiatives, and impoverish the country at home and abroad.

Ichiro Ozawa, head of the DPJ, is waiting impatiently. Mr. Ozawa has spent the past two decades trying to defeat the LDP, largely through populist measures such as reforming the tax code, improving social services, and distancing Japan from U.S. foreign policies -- in particular those related to the war on terrorism. For example, he has repeatedly expressed a desire to work more closely with the U.N. on international issues and avoid becoming entangled in U.S. global military activities.

Mr. Ozawa's policy preferences cause concern among "strong alliance" proponents on both sides of the Pacific. He is also seen as more pro-China than recent Japanese leaders, who have continuously, if quietly, balanced the economic benefits of closer Sino-Japanese relations with concern over Beijing's growing political influence and military strength.

Even if he wins, however, Mr. Ozawa will not have carte blanche to impose new foreign and domestic policy. The DPJ is riven with factions. Younger foreign policy "hawks" are uneasy with their leadership's call for closer cooperation with the U.N. or with China. Others are skeptical that the DPJ's plan for massive stimulus spending to jumpstart the economy will work any better than the LDP's failed pump-priming in the 1990s. Moreover, should the Democrats falter once they take power, young politicians across the political spectrum may find it more appealing to join forces, thus radically altering the Japanese political landscape.

Even if Japan's voters deliver a clear verdict in elections, whoever wins faces a tremendous economic challenge in 2009. Christmas news that manufacturing output plunged more than 8% in November underscores the bleak prospects for the coming months. The global slowdown has reached Japan's leading exporters, such as Toyota, and the knock-on effect on Japan's numerous domestic suppliers to multinationals will have widespread impact throughout an already fragile economy. Much of Japan's job growth the past decade was through temporary employment. Those workers are now being laid off in droves, putting pressure on social services.

Without a firm government policy to lower taxes and recover the reform mantle wielded by popular former prime minister Junichiro Koizumi, Japan's economic gains of the early decade are at risk, and the country may be facing yet another "lost decade." Combined with America's own extended slowdown, the world economy will be profoundly weakened by the problems plaguing its two largest economies.

The Obama Administration needs all the help it can get to shore up the global economy and ensure stability around the globe. Mr. Obama will undoubtedly find many areas of common interest with a potential Ozawa government, but both should learn from ineffective policies pursued during Japan's recession in the 1990s. Both will do well to recognize that their trans-Pacific partnership can be a powerful tool for solving some of the vexing problems they face, but only if both act resolutely.

Tokyo and Washington should jointly push for free trade to stimulate economic growth, set an example by lowering tax rates, promote development of new energy technologies, and commit to maintaining stability in Asia's common areas. Doing so will help both Japan and its American partner weather a year of living dangerously.

Mr. Auslin is a resident scholar at the American Enterprise Institute.

Remarks by National Security Advisor Stephen Hadley at CSIS

Remarks by National Security Advisor Stephen Hadley at the Center for Strategic and International Studies
CSIS, Washington, D.C. Jan 07, 2009

MR. HADLEY: Thank you, John, very much for those kind words. I'm honored to be here at the Center for Strategic and International Studies. I thank you for the research you conduct, the analysis you provide, and the policy ideas that you develop.

In less than two weeks, a new President will take the oath of office. And a watching world will witness the greatest of democratic transitions and traditions -- the peaceful transfer of power. President Bush's administration has been working closely with the President-elect's team to make this transition the smoothest in history. The stakes are clear.

America is a nation at war. And in the post-9/11 world, we face complex challenges that will not pause for a change in administrations.

Last month, President Bush delivered a series of speeches about how we have worked to confront these challenges over the past eight years. At the Saban Forum, the President discussed how our approach to the Middle East changed after 9/11. At West Point, the President explained how the military has transformed to meet the dangers of a new century. And at the Army War College, the President outlined the steps we have taken to keep America safe here at home, and to promote liberty abroad as the great alternative to terror.

Today I would like to talk to you about the core convictions that have formed the basis of President Bush's foreign policy -- what this administration has accomplished in key regions of the world -- and what opportunities and challenges await the next administration.

Over the past eight years, President Bush's foreign policy has been guided by three firm convictions. The President believes that liberty is God's gift to every man, woman, and child; that effective democratic states are the critical building blocks of a peaceful and prosperous international order; and that America is called to lead this community of democracies.

Ultimately, people will make the best decisions for themselves and for their societies if given the political freedom to do so. But to exercise that freedom, they must also be free from violence and injustice -- and be offered the means to overcome ignorance, want, and disease. Democratic states with effective institutions are best able to meet these needs and are our best partners in building a more peaceful and prosperous world. But these nations need American leadership. We are a wealthy and powerful nation with the capacity to make the world safer and better. And that imposes on us a moral obligation to do so. As President Bush often says, "To whom much is given, much is required."

These core convictions have helped President Bush steer his foreign policy through four popularly perceived but ultimately false choices.

The first false choice is between a "realistic" and an "idealistic" foreign policy. After 9/11, President Bush recognized that an idealistic foreign policy based on promoting liberty was the only realistic strategy for advancing America's fundamental interests. We are engaged in a great ideological struggle. And to prevail, we must counter the terrorists' dark ideology with a more hopeful alternative. As the President said in his second inaugural address: "The best hope for peace in our world is the expansion of freedom in all the worldt[and so] America's vital interests and our deepest beliefs are now one."

The second false choice is between unilateralism and multilateralism. President Bush recognizes that the United States can rarely achieve its objectives by acting alone. So our preference is always to work with allies and partners. Yet international partnerships are not self-justifying. They must produce results. And when necessary, like every modern President before him, President Bush has been prepared to act alone to defend America's security.

The third false choice is between hard power and soft power, or military force and diplomacy. The President understands that we do not have to choose between these tools. Instead, we must integrate all elements of national power -- including diplomatic, economic, and military -- to advance our interests. When properly employed, these tools can be mutually reinforcing. Hard power makes soft power more effective. And by maintaining the credible threat of military force and economic sanctions, we add weight to our diplomacy.

The fourth false choice is between popularity and principle. America has always been defined by our ideals of liberty and justice. These ideals have made our nation a beacon of hope and opportunity for people around the world. In the short run, acting on principle can be unpopular -- because our principles challenge the world views of many, and our power thwarts the hegemonic ambitions of the few. But ultimately it is our principles that make us attractive to most of the world -- and if we hold to them, the world will see, respect, and support us.

By defying these false choices, President Bush has pursued a foreign policy that has delivered results around the world.

In Europe, President Bush has worked to build a continent that is whole, free, and at peace; that is united by common values; and that joins with America to confront the challenges of the 21st century.

Under the President's leadership, America has helped consolidate post-[Cold] War democratic gains in Central and Eastern Europe. Today ten nations that were once behind the Iron Curtain are now members of Euro-Atlantic institutions. The people of Ukraine and Georgia have cast off tyranny and cast their votes in free elections. A reforming and democratic Turkey has a stronger relationship with the United States, and is moving closer to membership in the European Union. An expanded NATO alliance is fighting terrorists in Afghanistan and transforming to conduct operations beyond its borders.

Our strong relations across Europe present the next administration with many opportunities. Working with our European partners, the next administration should be able to enforce tougher sanctions on Iran; complete the integration of the Balkan states, including Kosovo and Serbia, into the transatlantic community; bring freedom to Belarus; and diversify the sources and routes of Europe's gas and oil supply.

On Russia, President Bush has worked to shift America's relationship from the rivalries of the Cold War to partnering with Russia in areas where we share common interests -- while managing our differences in a frank, consistent, and transparent way.

Today Russia and America are partnering on many fronts. We are working together to reduce operationally deployed strategic nuclear warheads. We are working together to prevent nuclear materials and technologies from falling into the hands of terrorists. We are working together to ensure that Iran and North Korea cannot threaten their neighbors with nuclear weapons. And we are working together to support negotiations in the Holy Land for a Palestinian state and a durable peace.

At the same time, we understand that true partnerships depend on shared democratic values. And insofar as Russia falls short of respecting the rights and freedoms of its people and its neighbors, the scope of our partnership is necessarily and correspondingly limited. President Bush has made clear to Russia's leaders that the "great powers" of the 21st century cannot pursue the coercive policies of the 19th century. A Russia that continues to threaten its neighbors and manipulate their access to energy will compromise any aspirations for greater global influence. The next administration will have the challenge of building on our cooperation with Russia while also confronting that nation's aggressiveness and uncertain intentions.

In the Middle East, President Bush emphatically rejected the widely held view that the Arab world was unsuited for democracy and its people unready for freedom. Instead, the President has promoted democracy, liberty, and tolerance throughout the region, supported our friends and allies, and confronted extremist states and groups. In many respects, the Middle East has become the center of gravity of American foreign policy -- the principal theater of operations and deployment of our military, the testing ground for the strength of our principles and ideals, and the focus of our most important diplomacy.

Today, despite the violence in Gaza, there is the prospect of a freer and more hopeful future for the region. With help from the United States, our Gulf allies have greater defensive capabilities and more confidence in their ability to confront terrorism and other threats. Saudi Arabia -- the birthplace of 15 of the 9/11 hijackers -- is one of America's most capable partners in counterterrorism operations. Libya has abandoned its dangerous weapons of mass destruction programs, ended its support for terror, paid more than $1 billion to victims of past terrorist activities, and welcomed its first U.S. ambassador in three decades. Lebanon has regained its sovereignty, independence, and democracy after nearly 30 years of Syrian occupation, thanks to the courage of its people and the joint diplomacy of France and the United States. And across the Middle East, more people participate in competitive elections -- and more women vote and hold office -- than ever before.

We also see reasons for hope in the Holy Land. Israelis and Palestinians have been negotiating the peace -- with Arab support -- based on a vision of two democratic states, Israel and Palestine, living side by side in peace and security. The United States is facilitating these talks. But we are not substituting ourselves for the parties or imposing our views on either side. In parallel with these negotiations, the United States is supporting Palestinian Authority President -- Prime Minister Salam Fayyad in his efforts to build the security, economic, and political institutions of a democratic state.

For the next administration, the biggest challenge in this region is Iran. Negotiations with Iran, as some have proposed, without leverage on Iran will not produce a change in Iranian behavior or advance U.S. interests. The outgoing administration and its international partners will leave the incoming team with significantly increased leverage on Iran. The issue is how the new team will use this leverage to produce a different Iranian policy on its nuclear program, terrorism, and Middle East peace.

Perhaps surprisingly, the biggest opportunity for the new administration may be Middle East peace. I hope the new team will not feel compelled to "reinvent the wheel," but will use the Annapolis process -- which has been embraced by the states of the region and enshrined in United States [sic] Security Council Resolution 1850 -- as an opportunity to advance the cause of peace. First and foremost, this means helping complete the building of the democratic institutions of a Palestinian state. This work is critical to any future peace. Second, it means using the confidential bilateral negotiations between Palestinians and Israelis already underway to negotiate the peace -- and build on the substantial progress that already has been made.

On Iraq, you have heard President Bush describe his strategy many times: to build a democratic Iraq that can govern itself, defend itself, sustain itself, and be an ally in the war on terror. This goal has not changed. It has not been "dumbed-down" in response to hard going on the ground. And its realization is now in view.

It is in view because in January 2007, President Bush made the decision to "surge" additional forces into Iraq and give them a mission of securing the population. President Bush took this decision at a time when many government officials and military officers initially recommended against it, when many in the intelligence community, Washington think tanks, and on the editorial pages thought Iraq was lost to civil war, and Congress was trying to constrain funds for the effort. But events have vindicated the President's decision.

Today, violence is down across Iraq. The Iraqi people govern themselves under one of the most progressive constitutions in the Middle East. And for the first time in the region's history, Sunni, Shia, and Kurds are working together within a democratic framework to build a more hopeful future for their country.

As the "return on success" of its policies, the administration has been reducing troops in Iraq from post-surge levels since the end of 2007. And we recently concluded agreements that envision the completion of the U.S. withdrawal by the end of 2011. As the members of the next administration carry out the status of forces agreement, they will have the opportunity to successfully conclude the American effort in Iraq. And as they implement the companion strategic framework agreement, America will gain a long-term democratic partner in the Middle East. Together, a democratic Iraq, a free Lebanon, and a democratic Palestinian state can be the keys to a transformed and more hopeful Middle East.

The Asia-Pacific is a region of increasing importance to America's security and economic well-being. President Bush has strengthened the institutional relationships that will allow the new President the better to advance our interests there. President Bush's strategy has been to revitalize existing alliances, establish new strategic partnerships, bring China into the international system as a responsible player, confront terrorist and proliferation threats, and promote freedom and democracy.

America is helping the people of Afghanistan recover from years of tyranny under the Taliban -- and build a more hopeful future of freedom. Today Afghanistan has a new democratic constitution, an elected parliament and president, more than 6 million children in school, 8,000 kilometers of new paved roads, and a growing military of 80,000 personnel.

We have maintained close relations with Afghanistan's neighbor -- Pakistan. We recognize that Pakistan faces enormous economic, political, and security challenges. But we also understand that Pakistan has a better chance of successfully meeting these challenges with a freely elected democratic government. And today Pakistan has such a government thanks in no small part to President Bush's skillful diplomacy.

We have formed a new strategic partnership with the world's largest democracy -- India. An historic agreement for civil nuclear cooperation has helped transform our relationship and make us global partners.

We have rebuilt relations with Indonesia -- the nation with the largest Muslim population in the world. Indonesia has now ended the insurgency in Aceh and is combating the threat of terrorism.
We have revitalized our security alliances with Japan, South Korea, and Australia. We have realigned and repositioned our military forces in these nations -- so we can better meet future challenges and reduce the burdens on local populations. And we have joined with our democratic allies to create the Asia Pacific Democracy Partnership to strengthen freedom in the region.

We have built a stronger relationship with China based on cooperation where we agree and candor where we disagree. Tensions with -- over Taiwan have eased considerably. And we continue to press China on human rights and religious freedom.

We have used the multilateral framework of the six-party talks to pressure North Korea to follow through on its agreements to abandon its nuclear weapons programs. These talks will be an early challenge for the incoming administration. North Korea will test the new administration by once again trying to split the six parties and renegotiate the deal. We have seen it before. And when its efforts to do so fail, North Korea will need to accept a verification agreement -- so we can verify the disablement and then dismantlement of that country's nuclear capabilities. Without this verification agreement, there can be no progress. This is especially true because some in the intelligence community have increasing concerns that North Korea has an ongoing covert uranium enrichment program.

Afghanistan will be another early challenge for the new administration. The Taliban remain a serious threat. Its fighters have found safe haven across the border in Pakistan. And if the extremists succeed in destabilizing Pakistan, the chaos will threaten peace and progress throughout the region. So stabilizing Pakistan must be a first priority of the new administration -- as it has been one of ours.

The new administration also has the opportunity to build on our efforts to link the countries of Central Asia with the nations of South Asia through a new axis of trade and energy. This axis can be the key to a more stable, prosperous, and democratic region.

And finally, I hope the new administration will continue pushing the cause of human rights and freedom in Burma.

In the Western Hemisphere, President Bush confronted the challenges of a region where many had begun to doubt the benefits of democracy and freedom. The President's strategy has been to help democratic governments in the region better serve their people -- and demonstrate that democracy can deliver and that freedom is the path to prosperity and a better life.

Under President Bush's leadership, the United States has renewed its commitment to social justice in the region. We've pledged $2 billion for new initiatives to improve access to health care, education, affordable housing, and economic opportunity. We have helped lift the burden of more than $3 billion of debt. We've negotiated free trade agreements with 10 nations, including two agreements awaiting approval from Congress. We've pledged $1.3 billion to help Mexico and Central American nations fight organized crime networks and drug traffickers. We are helping Colombia defeat the FARC and other narco-terrorists. We have formed an important strategic partnership with Brazil. And we are working with states like Brazil, Canada, Chile, Colombia, Mexico, Peru, and Uruguay to showcase the benefits of markets, democracy, and freedom -- as the alternative to competing visions based on populist rhetoric, statist economics, and authoritarian politics.

The commitment of these states represents an important opportunity for the new administration. As a good first step, the new Congress should approve the free trade agreements with Colombia and Panama -- as well as South Korea. And the most dramatic opportunity for advancing America's agenda in the hemisphere would be for the new administration to work with Congress to enact comprehensive immigration reform -- and build an immigration system that is compassionate and fair.

As seen best in Africa, President Bush has followed an approach to development that embraces partnership instead of paternalism. We work with democracies that govern justly, fight corruption, invest in the health and education of their people, embrace free trade and free markets to lift people out of poverty, and achieve results. President Bush and Congress have backed this strategy with unprecedent resources. During the President's first term, our nation tripled bilateral assistance to Sub-Saharan Africa. And we are on a pace to double our assistance again by 2010.

Across Africa, a new day of hope is dawning. Major conflicts have ended in Liberia, Angola, Sierra Leone, and Burundi. With American support, African leaders and regional organizations are stepping forward to help end violence in Darfur, Congo, and Somalia. Together, the countries of the G8 have relieved $34 billion of debt for 19 African countries. Through new initiatives, the United States is partnering with African nations to improve education, promote free enterprise, and combat the scourge of HIV/AIDS, malaria, and neglected tropical diseases through the international Global Fund and the President's Emergency Plan for AIDS Relief. And through the Millennium Challenge Corporation, we have signed 11 compacts with African nations to help their people build a brighter future. The people of Africa have a strong and reliable partner in the United States -- and I hope the next administration will continue this approach.

Finally, around the world, President Bush has led a global campaign against terror. After September 11th, 2001, President Bush recognized that terrorism was not just an issue of law enforcement, but a war to be won, a battle of arms and ideas.

One of the President's most significant contributions has been to establish the basic principles for waging this struggle: We will not wait for new threats to gather. We will fight the terrorists abroad -- so we do not have to face them here at home. We will make no distinction between the terrorists and those who harbor them. We will counter the ideology of violent extremism with a more hopeful vision of tolerance and freedom. And we will make clear that violence against civilians is never justified -- by any cause or creed.

We have seen the results of this approach. Together with a coalition of more than 90 nations, we have used all elements of our national power to kill or capture terrorist leaders, deny them safe haven, and choke off their financing. And thanks to the courage of the men and women who work day and night to defend our nation, we have saved lives around the world -- and have not experienced a terrorist attack on our soil for more than seven years.

The biggest threat to our nation would be the world's most dangerous weapons falling into the hands of the world's most dangerous terrorists. President Bush has placed great emphasis on countering proliferation of weapons of mass destruction. He created the Proliferation Security Initiative, which now includes over 90 countries that cooperate together to interdict the movement of WMD materials and technology on land, at sea, and in the air. Through other initiatives, the administration is helping to secure WMD materials and technology around the globe. And we have enhanced our defenses against the WMD threat. This includes building missile defenses that provide protection to the U.S. homeland, our deployed troops, and our allies from attacks by rogue states that might possess these weapons.

President Bush has put in place the tools that will permit future Presidents to succeed in the long struggle ahead. And I hope the next administration will preserve these tools and use them effectively to defend our security and freedom.

President Bush has led our nation during a time of great consequence. Few presidents have faced more challenges. But when the history books are written, they will tell the story of a man who never wavered from his principles, who kept our nation safe, and who helped spread the blessing of liberty to millions around the world.

As this administration ends and a new one begins, we can have confidence in the future of our nation -- because we can have confidence in the character of our people, the power of our ideals, and the enduring strength of our democracy. Along with every other American, I wish the President-Elect Obama and his team all the best and every success. Thank you. (Applause.)
DR. HAMRE: Thank you very much, Steve. We've got about 15 minutes for questions, and so let me open up the floor for those that would like -- please identify yourself so that I know who you are so that we can get -- get the ball rolling, please.

Q I am from Freedom House. And I represent an international non-profit organization that monitors freedom and democracy around the world since 1972. And we -- we release annual surveys with ratings on freedom in every country in the world. And we use complex methodology that is internationally recognized and respected. And our surveys show --

DR. HAMRE: Do you have a question? Let's have a question.

Q Yes. Our surveys show that for the past three years freedom was in retreat around the world. President Bush declared his freedom agenda to be a priority in the U.S. foreign policy. And I would like to know how you can -- what you can say about the -- how you can comment that our ratings show retreat in freedom around the world?

MR. HADLEY: I think one of the things we know is the advance of freedom is hard work and a long-term project. And I think it's had its ups and downs. And I think a three-year sample -- I'm sure that all your metrics are right, and you can say that it may have declined over the last three years.

I think what the President's agenda is based on the following notion. One, we need to hold the ideal of freedom out there as a rallying point for people. But also, they are national projects that advance the hard work of freedom that are going to take time.

I think -- the point I made with respect to the Middle East, I think that, as I said, there are more people voting, there are more people -- more women participating in government than there were in the past. But the truth is the project to bring freedom to the Middle East is going to depend on the success of the efforts in Lebanon, the success on the efforts in Iraq, and the success on building a Palestinian state, so that there are examples of free societies that are succeeding to give hope and examples in the region.

If you look at what's going on in Iraq, Tariq Aziz, the -- Dr. Rubaie, the National Security Advisor for Iraq, was in yesterday. And one of the things I talked to him about was what is really going on there is unprecedented in the history of Iraq, and unprecedented in the Middle East. Sunni, Shia, and Kurds are trying to work together in a democratic framework to advance a future for their country -- not Shia on top, Sunni on the bottom, or the reverse, which has been the history in the region -- but with them working together in a democratic framework.
The success of that experiment is terribly important if the issue of tensions within the Middle East is going to be resolved. If that experiment can succeed and be an example for the rest of the Middle East, you can, over time -- and it is the work of a long period of time -- advance and bring freedom to the Middle East. But it's going to take time, and it's not going to be something that you can take the temperature every year and say are we succeeding and failing, useful as that activity is.

So I think -- and the other thing I would say is, you know, there are setbacks. You know, we saw in 2004/2005 the advance of freedom. We saw, you know, the Rose Revolution, the Cedar Revolution, the Orange Revolution. And what we found in 2006 is the empire has a way of striking back, and the forces of reaction are strong.

So this work of freedom is going to take a long time. It is not the work of the Bush administration; it has been the project of America since its inception. We are founded as a nation not because of common language or common ethnic background; we are founded as a nation on a set of principles, and they have freedom and liberty on their core. And that is who we are as a people. And that is what we've done throughout our history. We have fought in world wars in order to advance the cause of freedom and democracy; it's what we are as a nation. And I think it is what every administration has done, with more or less emphasis.

And my hope for the new administration is that they maintain the emphasis, because as I think we've seen, and the President strongly believes, the challenges we face are from forces that oppose freedom and have a different view. And we are only going to defeat them is if we can offer an alternative to people of a democratic -- and a structure and society that will over time deliver a better life for their peoples.

Q Mr. Hadley, I was wondering if you could comment on an article in The New York Times a couple of weeks ago that spoke of an unprecedented effort on the part of the outgoing Bush administration to bring the incoming Obama national security and foreign policy team up to speed on the world's hot spots, drawing up special contingency plans. Can you confirm basically the gist of the article? And to what extent should anyone view this, if in fact this is the case, as an admission on the part of the outgoing administration that they're leaving a lot of loose ends for the incoming people to pick up?

MR. HADLEY: Well, I think "loose ends" is putting it mildly. (Laughter.) Look, there has, I think, rarely been a President who has had more challenges -- he would say opportunities -- than President Bush. And that means that there rarely has been an incoming President who has as many challenges and opportunities as President-Elect Obama.

We are doing this transition for the first time in over 50 years when the nation is at war, and when our forces are deployed in a global war on terror, but also with theaters in Iraq and Afghanistan. So it seems only appropriate in this different kind of historical time we have a different kind of transition. And this is very much a mutual effort by the outgoing team and the incoming team.

I was in the transition from President Ford to President Carter, and I must say I was surprised -- I stayed on with the new team for about three weeks, and all the vaunted secure filing cabinets in the Old EOB were empty. There was not a single piece of paper that was transitioned to the new team. And I've always thought this was very -- not good governance at its best.

So what we are doing is the following: One of the things we've done is we have taken the 40 key issues in this administration and we have prepared a document, which basically, on each one is a memorandum that says, this is what we found, this is what our strategy was, this is what we think we've accomplished, and this is the work that remains to be done. And behind that memorandum is a chronology of events within our administration and all the various source documents.

Why do we do this? The new team doesn't need to read them, certainly doesn't need to follow the policies in them. But we thought it was important, in this different kind of transition, for them to know what they have to work with -- what kind of policy is in place, what kind of relationships are in place, and what kind of tools they have available, and what we at least think are the challenges that are going to hit them quickly.

We've also got, as you would expect, the series of briefing memorandums and view-graph briefings on the issues of the day. We're also going to try and see if we can have some sessions where the outgoing NSC team meets with the incoming NSC team, sits down and has some briefings on particularly sensitive topics, brief them together so we can have some interaction and they can get a sense of how the various departments and agencies are working together on these -- some of these common problems.

So it is -- we are, both sides, with the direction of both President Bush and President-Elect Obama, trying to make this a very different transition, because we're in a very different time, and we all, as Americans, want the new team to succeed and to be able to take these challenges and turn them into opportunities for the country.

Q Thank you. Mr. Hadley, thank you very much. This is a great speech. I think this is the first time in many, many years I have heard this -- maybe a farewell speech by President Bush. My question is that you said that Pakistan has become a safe haven for terrorists. And it's been eight years now that many think tanks are saying that Pakistan is today a factory for terrorists, which they are exporting around the globe, including against India and also in the Middle East and so forth. It's been eight years now that billions of dollars has gone to Pakistan to curb the terrorists and also hatred against the West and against the U.S., and to close down madrassas and so forth. But still, in eight years, terrorism has not gone down, but it has gone up --

DR. HAMRE: I need a question. I need a question.

Q The question is that, what happened in eight years that we could not control terrorism there? And what advice do you have for your counterpart of the new administration, how they will do it and which we could not do -- and we still have at large Osama bin Laden? Thank you.

MR. HADLEY: Yes, I think that Pakistan is a victim of terror. And one of the things that people have focused on is, well, activities in certain of the border regions of Pakistan make more difficult achieving democratic stability in Afghanistan, which is true.

But I think one of the things we've also seen is that those -- that terrorist presence -- Taliban, al Qaeda, and other extremist groups -- also are a threat to Pakistan. And I think the -- this democratic government in Pakistan understands that. If you talk to President Zardari, he says, you don't need to tell me that Pakistanis are victims of terror; the terrorists killed my wife.

So what you have is a democratic government in Pakistan, and we think that is a real opportunity, because we think that democratic government has the opportunity to rally the people of Pakistan in -- behind what is going to be a very difficult fight. This is a new government. It is getting its bearings. It faces severe terrorist threats from organizations that have deep roots into the society. They have a military force that was designed for conventional conflict with India, not for dealing with counterterrorism.

What we've learned in all of these things, that it takes a long time. I think in the early years after the war on terror, we made some great progress. I think we should not underestimate the difficulty of President Musharraf after 9/11 being called upon to make a strategic shift and going against al Qaeda and being willingness -- willing to do so. And in the years past 2001, in the first three or four years of the war on terror, most of the al Qaeda leadership which were killed or captured were killed or captured in Pakistan.

But there was a period of time, about two to three years ago, when Pakistan tried negotiating arrangements with tribal groups on the grounds that they would control the terrorists, and I think those arrangements for a lot of reasons did not work. And then Pakistan went into a very difficult political transition from which this new government has emerged.

And that's where we are -- a new government that I think is talking clearly that it wants to confront terror, but does not really at this point have the tools and has probably as difficult a challenge to deal with the various groups that it has of any nation.

And that's why I think it is going to be one of the key challenges, because success in Pakistan, overcoming this challenge, is important for stability in Pakistan, which is important to us in itself. But stability in Pakistan is also going to be important and success in the war on terror in Pakistan is also going to be important if we're going to take care of the problem in Afghanistan and if we are going to get Pakistan and Indian relations to continue on a positive footing.

So there is a lot at stake in Pakistan, and they have as daunting a task as any government today. And it is going to be very important for the new team to support their efforts, and I'm encouraged. I think you've seen statements from President-Elect Obama, certainly from President-Elect -- Vice President Biden, that I think they understand the challenge that Pakistan faces, and that means the challenge we face.

Q Mr. Hadley, could you say a little bit more about Mexico? You mentioned the Mérida program, which your administration effectively saw through. Has the money been released? And -- but more generally, is the problem being effectively tackled in Mexico? The Calderón government has deployed 36,000 troops across the country, and yet the killings continue and there seems to be a real problem there.

MR. HADLEY: I did not probably say enough about that. I think that is a real challenge for the new team, as well. Mexico I think is -- obviously if you talk to Mexican authorities, they feel very much under threat. And it's -- you know, the way to understate it is to say it is a terrorism problem, it is a narco-trafficking problem. I think a better way to see it is that it is a potential threat to the future of a democratic Mexico. And I think if you listen to President Calderón, that's how he sees it. It is very much the kind of threat that President Uribe faced in Colombia.

There are things we can do, and the Mérida Initiative has a long list of training, equipment, and other things we can provide to make Mexican authorities more effective in dealing with this problem. But the Mexican authorities have some choices they have to make, as well, and it's this old problem -- for the moment, it is being fought in the context of a law enforcement model, with the military now engaged, which has been a difficult issue for Mexican society, but in this odd arrangement in conjunction and in support of the law enforcement.

So my understanding is the military go after people with a warrant in hand. You can work that, I suppose, but I think the real question for the Mexican authorities and for their politics: Is the level of effort and commitment they are making proportional to the threat that the problem is -- poses to the future of that government? And then the question for us is, are we doing all we can to support them, to make them more capable and more effective? That in itself is a difficult issue for Mexico, given the history between the United States and Mexico. And I think they have been quite courageous, and it's an indication of the measure of seriousness with which they view the problem is that they are willing to consider a kind of cooperation with the United States that would have been unthinkable 10 years ago.

The President is -- President Bush is very impressed with President Calderón. We think he has the right plan. He has a challenge, obviously, to mobilize his society to make the commitment to deal with this problem. And then we in turn need to do what we need -- what we can to help them, because a problem on the southern side of the border, if we do not handle it, will be an even more severe problem on the north of the border -- that is to say, in the United States. It's a problem now, and it could get worse.

So we think what we have left for the new team is a good framework. Thanks to the Congress we have some -- an initial down payment of some important resources to put into it. But again, this is going to be one of those long, long struggles.

I think the importance of what has happened in Colombia in a program started by the Clinton administration and continued by ours, and really because of President Uribe in Colombia, is, this can be done. Democratic societies do not need to give in to these narco-terrorists. It's a long fight. It requires a commitment. It requires help. But I think the lesson from Colombia is that these fights can be won, and we need to then help Mexico to win its fight, as well.

Q Sir, you mentioned U.S.-China relations. You touched upon cross-strait relationship, the reduction of tension. How -- could you elaborate a little bit more on the current state of U.S.-China relations, which seems to be one of the bright spots of President Bush's foreign policy successes, and also the current state of U.S.-Taiwan relations, which experienced some very hard times over the last eight years? Thank you very much.

MR. HADLEY: What President Bush has tried to do is have a course that basically respects, you know, the One China policy and all the rest, and the three communiqués which are the bulwark of our policy with respect to China, but also to make very clear that we -- that both sides, China and Taiwan, need to respect the status quo, and there needs to be no unilateral actions by either side. And that was very much his -- the framework of his policy with respect to China, and at the same time making very clear to China that we would carry out our obligations under the Taiwan Relations Act to make sure that Taiwan had the capacity to provide for its own defense.

And the President stood very firm with respect to those principles. And I think that helped get through a difficult patch in the relations between China and Taiwan, and have helped encourage what is really a very hopeful turn in relations between China and Taiwan.

But I want to make another point, which is that when China -- when President Bush approached Asia, he approached it not by starting first with our relations with China, but starting first with our relations with our traditional allies. And he took, as part of his -- a central feature of his Asia policy -- to strengthen those alliances and to try and deal with a pretty long list of unresolved issues and irritants in those relationships, dealing with our force presence, the location of our forces, and all the rest, and working with successive governments in Japan and South Korea.

We have really worked through that list over these last eight years. And I think those relationships are very strong. And that provides a platform for the United States in dealing with China, both the opportunities and challenges presented by China.

So I think it is also very important for the new administration to think in the same way about how they are going to approach the issue of Asia more generally, and to see our relations with China in that broader context.

DR. HAMRE: Ladies and gentlemen, I know there are more questions, I'm sorry, but we promised the National Security Advisor we'd be out by 11:30 a.m., so thank you all. Please stay in your seats just so we could get him out through the security pattern. Thank you. Let's all thank him for a great presentation. (Applause.)

END 11:32 A.M. EST