Uncertainty and the Slow Recovery. By GARY S. BECKER, STEVEN J. DAVIS AND KEVIN M. MURPHY
A recession is a terrible time to make major changes in the economic rules of the game.
WSJ, Monday, January 4, 2010
In terms of U.S. output contractions, the so-called Great Recession was not much more severe than the recessions in 1973-75 and 1981-82. Yet recovery from the latest recession has started out much more slowly. For example, real GDP expanded by 7.7% in 1983 after unemployment peaked at 10.8% in December 1982, whereas GDP grew at an unimpressive annual rate of 2.2% in the third quarter of 2009. Although the fourth quarter is likely to show better numbers—probably much better—there are no signs of an explosive take off from the recession.
We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government. The confidence of bankers and venture capitalists has been shattered, at least for a while, and it will take time for them to recover from the financial turmoil of the past couple of years. The household sector also faces a difficult period of financial retrenchment in the wake of a major collapse in home prices, overextended debt positions for many, and high unemployment.
The second factor is less obvious, but possibly also of great importance. Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations—changes that could radically transform the American economy.
The efforts to transform the economy began with a fiscal stimulus package of nearly $800 billion. While some elements served the package's stated purpose and helped to soften the recession's impact, the overall package was not well designed to foster a speedy recovery or set the stage for long-term growth. Instead, the "stimulus" was oriented to sectors that liberal Democrats believe are deserving of much greater federal help. This explains why much of the stimulus money is going toward education, health, energy conservation, and other activities that would do little to soak up unemployed resources and stimulate the economy.
In terms of discouraging a rapid recovery, other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes. In addition, discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.
Congressional "reforms" of the American health delivery system have gone through dozens of versions. The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest, expand and hire harms households as well, because it slows the creation of new jobs and the growth of labor incomes.
The administration also indicated early on that it would take a different approach to antitrust policy, reversing a 30-year trend toward more consumer-based interpretations of antitrust laws. Likewise, the installation of a pay "czar" in Washington is scary, even though his activities are so far confined to companies that received substantial bailout assistance from the Treasury. Perhaps as a next step, Congress will decide that executive pay is too high generally and levy special taxes on bonuses, or impose other controls over executive compensation—as the British and French have done. Congress is also considering major new regulations on consumer financial products.
In its efforts to combat the financial crisis and recession, the Fed created over $1 trillion of excess reserves at banks through various bailout programs and open market operations. When banks draw on these reserves for loans to businesses and households, there is a potential for the money supply to grow rapidly, possibly producing a substantial inflation. How hard the Fed will fight inflationary pressures through open market sales and other actions that raise interest rates is a significant source of uncertainty about future inflation and about the potential for monetary policy tightening to choke off the recovery.
The uncertainty about monetary policy has important political dimensions as well. The Fed now faces greater political pressures than at any other time in the past quarter century, as seen from the grilling the Senate Banking committee gave to Fed Chairman Ben Bernanke in deciding whether to approve his reappointment. These pressures may intensify greatly if, and when, future Fed actions to restrain inflation conflict with politicians' desires to prop up housing and the major government enterprises enmeshed in housing finance.
Even though some of the proposed antibusiness policies might never be implemented, they generate considerable uncertainty for businesses and households. Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending—despite their huge excess reserves—reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases.
Several pieces of evidence point to extreme caution by businesses and households. A regular survey by the National Federation of Independent Businesses (NFIB) shows that recent capital expenditures and near-term plans for new capital investments remain stuck at 35-year lows. The same survey reveals that only 7% of small businesses see the next few months as a good time to expand. Only 8% of small businesses report job openings, as compared to 14%-24% in 2008, depending on month, and 19%-26% in 2007.
The weak economy is far and away the most prevalent reason given for why the next few months is "not a good time" to expand, but "political climate" is the next most frequently cited reason, well ahead of borrowing costs and financing availability. The authors of the NFIB December 2009 report on Small Business Economic Trends state: "the other major concern is the level of uncertainty being created by government, the usually [sic] source of uncertainty for the economy. The 'turbulence' created when Congress is in session is often debilitating, this year being one of the worst. . . . There is not much to look forward to here."
Government statistics tell a similar story. Business investment in the third quarter of 2009 is down 20% from the low levels a year earlier. Job openings are at the lowest level since the government began measuring the concept in 2000. The pace of new job creation by expanding businesses is slower than at any time in the past two decades and, though older data are not as reliable, likely slower than at any time in the past half-century. While layoffs and new claims for unemployment benefits have declined in recent months, job prospects for unemployed workers have continued to deteriorate. The exit rate from unemployment is lower now than any time on record, dating back to 1967.
According to the Michigan Survey of Consumers, 37% of households plan to postpone purchases because of uncertainty about jobs and income, a figure that has not budged since the second quarter of 2009, and one that remains higher than any previous year back to 1960.
These facts suggest that it was a serious economic mistake to press for a hasty, major transformation of the U.S. economy on the heels of the worst financial crisis in decades. A more effective approach would have been to concentrate first on fighting the recession and laying solid foundations for growth. They should have put plans to re-engineer the economy on the backburner, and kept them there until the economy emerged fully from the recession and returned to robust growth. By failing to adopt a measured approach to economic policy, Congress and the president may be slowing the economic recovery, and thereby prolonging the distress from the recession.
The authors are economists at the University of Chicago. Messrs. Becker and Murphy are also fellows of the Hoover Institution of Stanford University. Mr. Davis is also a visiting scholar at the American Enterprise Institute.
Sunday, January 3, 2010
How Abdulmutallab got on the plane - was granted Fourth Amendment reasonableness rights
Intelligence Is a Terrible Thing to Waste. By L. GORDON CROVITZ
President Obama doesn't need an investigation to figure out how Umar Farouk Abdulmutallab got on a Detroit-bound plane.
WSJ, Monday, January 4, 2010
Intelligence about terror threats rarely comes on such a silver platter: A Nigerian banker went to the U.S. Embassy in Lagos to warn that his son had fallen under "the influence of religious extremists based in Yemen" and was a security risk. This came after months of U.S. intelligence intercepts about al Qaeda plans for an attack using a Nigerian man. Umar Farouk Abdulmutallab paid for his ticket with cash and didn't check any luggage.
Yet a headline in the Washington Post summed up the current state of our intelligence: "Uninvestigated Terrorism Warning About Detroit Suspect Called Not Unusual."
President Obama promises to investigate what went wrong, but there's no big mystery. He should simply review testimony put in the public record in early December, before the Christmas Day incident. Sen. Joe Lieberman's Homeland Security Committee heard an explanation of how U.S. intelligence agencies decide when to put suspected terrorists on a watch list or a no-fly list.
Timothy Healy, the head of the FBI's Terrorist Screening Center, explained the unit's "reasonable suspicion" standard like this:
"Reasonable suspicion requires 'articulable' facts which, taken together with rational inferences, reasonably warrant a determination that an individual is known or suspected to be or has been engaged in conduct constituting, in preparation for, in aid of, or related to, terrorism and terrorist activities, and is based on the totality of the circumstances. Mere guesses or inarticulate 'hunches' are not enough to constitute reasonable suspicion."
If this sounds like legalistic language, it is. Indeed, a quick Web search was a reminder that this language is adapted from Terry v. Ohio, a landmark Supreme Court case in 1968 that determined when Fourth Amendment protection against unreasonable searches allows the police to frisk civilians or conduct traffic stops. In other words, foreign terrorists have somehow now been granted Fourth Amendment reasonableness rights that courts intended to protect Americans being searched by the local police. Thus was Abdulmutallab allowed on the airplane with his explosives.
The difference between law-enforcement procedures and preventing terrorism could not be clearer. If a well-respected banker takes the initiative to come to a U.S. embassy in Nigeria to report that he thinks his son is a terrorist, we expect intelligence officers to make "hunches," such as that this person should have his visa reviewed and be searched before getting on a plane. Information is our defense against terrorism, but evidence of terror plots is often incomplete, which is why intelligence requires combining facts with hunches.
The result of prohibiting hunches was that Abdulmutallab was waved through. Information about suspected terrorists flows into a central Terrorist Screening Database, which is then analyzed by the Terrorist Screening Center, where FBI agents apply the "reasonable suspicion" standard to assign people to various watch lists including "selectee" lists and the "no-fly" list. It's at this point where an approach based on domestic law enforcement trump prevention, undermining the use of information.
Aside from concluding that we are misapplying a reasonableness test, the Abdulmutallab investigation likely will conclude that information in the databases of the National Security Agency, CIA and State Department weren't properly mined to connect dots. His name went onto the list of 400,000 people who might have links to terror, but not the list of 14,000 subject to multiple screenings before boarding an airplane or the list of 3,400 people who are not permitted to fly.
The Obama administration has leaned toward treating terrorism as a matter for domestic law enforcement, such as trying terrorists in civilian courts instead of in military tribunals. But this legalistic culture also undermined intelligence in the Fort Hood case in November. The FBI knew that Maj. Nidal Malik Hasan had been exchanging emails with a Yemen-based imam with ties to the 9/11 hijackers. The agency, operating by the standards of domestic law enforcement instead of applying information to prevention, surmised that the "content was explainable by his research" and failed to warn the Army of its potential risk.
In contrast, British authorities last May denied Abdulmutallab the right to re-enter the United Kingdom, where he had been president of an Islamic Society while in college. In Britain, domestic intelligence is the job of M15, which unlike the FBI has no power to arrest or responsibility for criminal prosecutions. Instead, it is free to focus on gathering intelligence, making hunches and preventing wrongdoing. The British ban on Abdulmutallab didn't require any FBI-like "reasonable suspicion" test.
After 9/11, the key political issue that went unresolved was what Americans expect from their intelligence agents. We send the mixed message that we want them to prevent attacks, but only if they operate under strict restrictions based on rules crafted for domestic law enforcement.
We have a choice. We can limit how information is used or we can allow smart use of information to prevent attacks. If we continue to choose to limit how information can be used in our defense, we shouldn't be surprised when our defenses fail.
President Obama doesn't need an investigation to figure out how Umar Farouk Abdulmutallab got on a Detroit-bound plane.
WSJ, Monday, January 4, 2010
Intelligence about terror threats rarely comes on such a silver platter: A Nigerian banker went to the U.S. Embassy in Lagos to warn that his son had fallen under "the influence of religious extremists based in Yemen" and was a security risk. This came after months of U.S. intelligence intercepts about al Qaeda plans for an attack using a Nigerian man. Umar Farouk Abdulmutallab paid for his ticket with cash and didn't check any luggage.
Yet a headline in the Washington Post summed up the current state of our intelligence: "Uninvestigated Terrorism Warning About Detroit Suspect Called Not Unusual."
President Obama promises to investigate what went wrong, but there's no big mystery. He should simply review testimony put in the public record in early December, before the Christmas Day incident. Sen. Joe Lieberman's Homeland Security Committee heard an explanation of how U.S. intelligence agencies decide when to put suspected terrorists on a watch list or a no-fly list.
Timothy Healy, the head of the FBI's Terrorist Screening Center, explained the unit's "reasonable suspicion" standard like this:
"Reasonable suspicion requires 'articulable' facts which, taken together with rational inferences, reasonably warrant a determination that an individual is known or suspected to be or has been engaged in conduct constituting, in preparation for, in aid of, or related to, terrorism and terrorist activities, and is based on the totality of the circumstances. Mere guesses or inarticulate 'hunches' are not enough to constitute reasonable suspicion."
If this sounds like legalistic language, it is. Indeed, a quick Web search was a reminder that this language is adapted from Terry v. Ohio, a landmark Supreme Court case in 1968 that determined when Fourth Amendment protection against unreasonable searches allows the police to frisk civilians or conduct traffic stops. In other words, foreign terrorists have somehow now been granted Fourth Amendment reasonableness rights that courts intended to protect Americans being searched by the local police. Thus was Abdulmutallab allowed on the airplane with his explosives.
The difference between law-enforcement procedures and preventing terrorism could not be clearer. If a well-respected banker takes the initiative to come to a U.S. embassy in Nigeria to report that he thinks his son is a terrorist, we expect intelligence officers to make "hunches," such as that this person should have his visa reviewed and be searched before getting on a plane. Information is our defense against terrorism, but evidence of terror plots is often incomplete, which is why intelligence requires combining facts with hunches.
The result of prohibiting hunches was that Abdulmutallab was waved through. Information about suspected terrorists flows into a central Terrorist Screening Database, which is then analyzed by the Terrorist Screening Center, where FBI agents apply the "reasonable suspicion" standard to assign people to various watch lists including "selectee" lists and the "no-fly" list. It's at this point where an approach based on domestic law enforcement trump prevention, undermining the use of information.
Aside from concluding that we are misapplying a reasonableness test, the Abdulmutallab investigation likely will conclude that information in the databases of the National Security Agency, CIA and State Department weren't properly mined to connect dots. His name went onto the list of 400,000 people who might have links to terror, but not the list of 14,000 subject to multiple screenings before boarding an airplane or the list of 3,400 people who are not permitted to fly.
The Obama administration has leaned toward treating terrorism as a matter for domestic law enforcement, such as trying terrorists in civilian courts instead of in military tribunals. But this legalistic culture also undermined intelligence in the Fort Hood case in November. The FBI knew that Maj. Nidal Malik Hasan had been exchanging emails with a Yemen-based imam with ties to the 9/11 hijackers. The agency, operating by the standards of domestic law enforcement instead of applying information to prevention, surmised that the "content was explainable by his research" and failed to warn the Army of its potential risk.
In contrast, British authorities last May denied Abdulmutallab the right to re-enter the United Kingdom, where he had been president of an Islamic Society while in college. In Britain, domestic intelligence is the job of M15, which unlike the FBI has no power to arrest or responsibility for criminal prosecutions. Instead, it is free to focus on gathering intelligence, making hunches and preventing wrongdoing. The British ban on Abdulmutallab didn't require any FBI-like "reasonable suspicion" test.
After 9/11, the key political issue that went unresolved was what Americans expect from their intelligence agents. We send the mixed message that we want them to prevent attacks, but only if they operate under strict restrictions based on rules crafted for domestic law enforcement.
We have a choice. We can limit how information is used or we can allow smart use of information to prevent attacks. If we continue to choose to limit how information can be used in our defense, we shouldn't be surprised when our defenses fail.
The Biggest Losers - Behind the Christmas Eve taxpayer massacre at Fannie and Freddie
The Biggest Losers. WSJ Editorial
Behind the Christmas Eve taxpayer massacre at Fannie and Freddie.
WSJ, Monday, January 4, 2010
Happy New Year, readers, but before we get on with the debates of 2010, there's still some ugly 2009 business to report: To wit, the Treasury's Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.
The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses—a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?
The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."
The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.
The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.
Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.
This subterfuge also explains the Christmas Eve timing. After December 31, Team Obama would have needed the consent of Congress to raise the taxpayer exposure beyond $400 billion. By law, negative net worth at the companies forces them into "receivership," which means they have to be wound down.
Unlimited bailouts will now allow the Treasury to keep them in conservatorship, which means they can help to conserve the Democratic majority in Congress by increasing their role in housing finance. With the Federal Reserve planning to step back as early as March from buying $1.25 trillion in mortgage-backed securities, Team Obama is counting on Fan and Fred to help reflate the housing bubble.
That's why on Christmas Eve Treasury also rolled back a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion. Risk-taking will now increase, so that the government can once again follow Barney Frank's infamous advice that the companies "roll the dice" on subsidies for affordable housing.
All of which would seem to make the CEOs of Fannie and Freddie the world's most overpaid bureaucrats. A release from the Federal Housing Finance Agency that also fell in the Christmas Eve forest reports that, after presiding over a combined $24 billion in losses last quarter, Fannie CEO Michael Williams and Freddie boss Ed Haldeman are getting substantial raises. Each is now eligible for up to $6 million annually.
Freddie also has one of the world's highest-paid human resources executives. Paul George's total compensation can run up to $2.7 million. It must require a rare set of skills to spot executives capable of losing billions of dollars.
Where is Treasury's pay czar when we actually need him? You guessed it, Fannie and Freddie are exempt from the rules applied to the TARP banks. The government gave away the game that these firms are no longer in the business of making profits when it announced that the CEOs will be paid entirely in cash, though it is discouraging that practice at other big banks. Who would want stock in the Department of Housing and Urban Development?
Meanwhile, these biggest of Beltway losers continue to be missing from the debate over financial reform. The Treasury still hasn't offered its long-promised proposals even as it presses reform on banks that played a far smaller role in the financial mania and panic. Senate Banking Chairman Chris Dodd (D., Conn.) and ranking Republican Richard Shelby recently issued a joint statement on their "progress" toward financial regulatory reform, but their list of goals also doesn't mention Fannie or Freddie.
Since Mr. Shelby has long argued for reform of these government-sponsored enterprises, their absence suggests that Mr. Dodd's longtime effort to protect Fan and Fred is once again succeeding. It would be worse than a shame if, having warned about the iceberg for years, Mr. Shelby now joins Mr. Dodd in pretending that these ships aren't sinking.
In today's Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money. The politicians have used the panic as an excuse to reform everything but themselves.
Behind the Christmas Eve taxpayer massacre at Fannie and Freddie.
WSJ, Monday, January 4, 2010
Happy New Year, readers, but before we get on with the debates of 2010, there's still some ugly 2009 business to report: To wit, the Treasury's Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.
The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses—a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?
The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."
The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.
The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.
Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.
This subterfuge also explains the Christmas Eve timing. After December 31, Team Obama would have needed the consent of Congress to raise the taxpayer exposure beyond $400 billion. By law, negative net worth at the companies forces them into "receivership," which means they have to be wound down.
Unlimited bailouts will now allow the Treasury to keep them in conservatorship, which means they can help to conserve the Democratic majority in Congress by increasing their role in housing finance. With the Federal Reserve planning to step back as early as March from buying $1.25 trillion in mortgage-backed securities, Team Obama is counting on Fan and Fred to help reflate the housing bubble.
That's why on Christmas Eve Treasury also rolled back a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion. Risk-taking will now increase, so that the government can once again follow Barney Frank's infamous advice that the companies "roll the dice" on subsidies for affordable housing.
All of which would seem to make the CEOs of Fannie and Freddie the world's most overpaid bureaucrats. A release from the Federal Housing Finance Agency that also fell in the Christmas Eve forest reports that, after presiding over a combined $24 billion in losses last quarter, Fannie CEO Michael Williams and Freddie boss Ed Haldeman are getting substantial raises. Each is now eligible for up to $6 million annually.
Freddie also has one of the world's highest-paid human resources executives. Paul George's total compensation can run up to $2.7 million. It must require a rare set of skills to spot executives capable of losing billions of dollars.
Where is Treasury's pay czar when we actually need him? You guessed it, Fannie and Freddie are exempt from the rules applied to the TARP banks. The government gave away the game that these firms are no longer in the business of making profits when it announced that the CEOs will be paid entirely in cash, though it is discouraging that practice at other big banks. Who would want stock in the Department of Housing and Urban Development?
Meanwhile, these biggest of Beltway losers continue to be missing from the debate over financial reform. The Treasury still hasn't offered its long-promised proposals even as it presses reform on banks that played a far smaller role in the financial mania and panic. Senate Banking Chairman Chris Dodd (D., Conn.) and ranking Republican Richard Shelby recently issued a joint statement on their "progress" toward financial regulatory reform, but their list of goals also doesn't mention Fannie or Freddie.
Since Mr. Shelby has long argued for reform of these government-sponsored enterprises, their absence suggests that Mr. Dodd's longtime effort to protect Fan and Fred is once again succeeding. It would be worse than a shame if, having warned about the iceberg for years, Mr. Shelby now joins Mr. Dodd in pretending that these ships aren't sinking.
In today's Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money. The politicians have used the panic as an excuse to reform everything but themselves.
A tax increase that will cause many seniors to lose private benefits
ObamaCare on Drugs. WSJ Editorial
A tax increase that will cause many seniors to lose private benefits.
The Wall Street Journal, page A10, Jan 02, 2009
Democrats are starting to mash together the Senate and House health-care bills, all of the negotiations taking place in secret. One reason to keep quiet is so voters don't discover items like the Senate's destructive change in the way retiree health benefits are taxed. This is a revenue grab that will cost many retirees their private drug benefit coverage, with knock-on harm for the federal budget and financial markets.
When the Medicare prescription drug benefit was created in 2003, one concern was that businesses that provided private drug coverage for seniors would dump them into the new taxpayer-funded plan. So Congress created a modest tax subsidy—equal to 28% of the total cost of a drug plan—to encourage employers to maintain coverage for retirees who would otherwise enroll in Medicare. On average, this subsidy will cost the government about $665 per person in 2011, according to the Employee Benefit Research Institute, while the same Medicare coverage would run about $1,209.
Currently, the $665 a business gains by providing benefits—and keeping one senior off Medicare—is not taxed. By instead treating the subsidy as income taxed at the 35% corporate rate, Democrats expect to raise about $5.4 billion for ObamaCare—and while that's a pittance in the scheme of a new multitrillion-dollar price tag, it's also based on a static tax analysis that is surely wrong.
The cost of offering drug benefits will rise by about $233 per retiree, making Medicare a far more attractive option for businesses. Private drug coverage is already on the decline, but Verizon, Xerox, Boeing, Metlife, Caterpillar and other companies are already warning that they may be forced to cut benefits. (Consider this another reward for the Business Roundtable's decision to promote ObamaCare.)
As more employers drop drug coverage, Congress won't be dispensing as many subsidies with the one hand that it can tax with the other, so revenue will fall. The retirees who lose private benefits will simply move onto Medicare, so public drug spending will also rise. The American Benefits Council, which represents the largest employers, estimates the tax will be a net loser for the government if just one out of four retirees is crowded out of private coverage.
That $233 may not sound like a lot, but under an accounting rule established in 1990, companies are required to report and expense their long-term retiree health liabilities on their financial statements, including actual paid claims and certain future payments. The deferred losses from the tax change thus must be immediately reflected on their balance sheets, which would take a huge bite out of reported earnings in 2010. Given the shaky economy, not to mention the political uncertainty that Washington continues to generate, is this really the best idea?
This is merely one example of how careless Democrats have been about the details as they dash to pass ObamaCare, even as they behave as if the results of their major changes to the health market will match perfectly with their perfectly unrealistic rhetoric.
"One of the things I've learned is that the Econ 101 approach to life where all that matters is the direct financial incentives or penalties is just wrong," Obama budget director Peter Orszag said in December. "Not to say that it doesn't matter, but exclusive focus on rational, perfectly optimizing behavior is just not, not where it's at."
When even the budget scorekeeper spurns economic incentives, you know pure politics is in charge. We suspect the White House will discover soon enough that everyone is a lot more rational, and a lot smarter, that it presumes.
A tax increase that will cause many seniors to lose private benefits.
The Wall Street Journal, page A10, Jan 02, 2009
Democrats are starting to mash together the Senate and House health-care bills, all of the negotiations taking place in secret. One reason to keep quiet is so voters don't discover items like the Senate's destructive change in the way retiree health benefits are taxed. This is a revenue grab that will cost many retirees their private drug benefit coverage, with knock-on harm for the federal budget and financial markets.
When the Medicare prescription drug benefit was created in 2003, one concern was that businesses that provided private drug coverage for seniors would dump them into the new taxpayer-funded plan. So Congress created a modest tax subsidy—equal to 28% of the total cost of a drug plan—to encourage employers to maintain coverage for retirees who would otherwise enroll in Medicare. On average, this subsidy will cost the government about $665 per person in 2011, according to the Employee Benefit Research Institute, while the same Medicare coverage would run about $1,209.
Currently, the $665 a business gains by providing benefits—and keeping one senior off Medicare—is not taxed. By instead treating the subsidy as income taxed at the 35% corporate rate, Democrats expect to raise about $5.4 billion for ObamaCare—and while that's a pittance in the scheme of a new multitrillion-dollar price tag, it's also based on a static tax analysis that is surely wrong.
The cost of offering drug benefits will rise by about $233 per retiree, making Medicare a far more attractive option for businesses. Private drug coverage is already on the decline, but Verizon, Xerox, Boeing, Metlife, Caterpillar and other companies are already warning that they may be forced to cut benefits. (Consider this another reward for the Business Roundtable's decision to promote ObamaCare.)
As more employers drop drug coverage, Congress won't be dispensing as many subsidies with the one hand that it can tax with the other, so revenue will fall. The retirees who lose private benefits will simply move onto Medicare, so public drug spending will also rise. The American Benefits Council, which represents the largest employers, estimates the tax will be a net loser for the government if just one out of four retirees is crowded out of private coverage.
That $233 may not sound like a lot, but under an accounting rule established in 1990, companies are required to report and expense their long-term retiree health liabilities on their financial statements, including actual paid claims and certain future payments. The deferred losses from the tax change thus must be immediately reflected on their balance sheets, which would take a huge bite out of reported earnings in 2010. Given the shaky economy, not to mention the political uncertainty that Washington continues to generate, is this really the best idea?
This is merely one example of how careless Democrats have been about the details as they dash to pass ObamaCare, even as they behave as if the results of their major changes to the health market will match perfectly with their perfectly unrealistic rhetoric.
"One of the things I've learned is that the Econ 101 approach to life where all that matters is the direct financial incentives or penalties is just wrong," Obama budget director Peter Orszag said in December. "Not to say that it doesn't matter, but exclusive focus on rational, perfectly optimizing behavior is just not, not where it's at."
When even the budget scorekeeper spurns economic incentives, you know pure politics is in charge. We suspect the White House will discover soon enough that everyone is a lot more rational, and a lot smarter, that it presumes.
Why the Health-Care Bills Are Unconstitutional. - If the government can mandate the purchase of insurance, it can do anything
Why the Health-Care Bills Are Unconstitutional. By Orrin Hatch, J Kenneth Blackwell and Kenneth Klukowski
If the government can mandate the purchase of insurance, it can do anything.
The Wall Street Journal, page A11, Jan 02, 2009
President Obama's health-care bill is now moving toward final passage. The policy issues may be coming to an end, but the legal issues are certain to continue because key provisions of this dangerous legislation are unconstitutional. Legally speaking, this legislation creates a target-rich environment. We will focus on three of its more glaring constitutional defects.
First, the Constitution does not give Congress the power to require that Americans purchase health insurance. Congress must be able to point to at least one of its powers listed in the Constitution as the basis of any legislation it passes. None of those powers justifies the individual insurance mandate. Congress's powers to tax and spend do not apply because the mandate neither taxes nor spends. The only other option is Congress's power to regulate interstate commerce.
Congress has many times stretched this power to the breaking point, exceeding even the expanded version of the commerce power established by the Supreme Court since the Great Depression. It is one thing, however, for Congress to regulate economic activity in which individuals choose to engage; it is another to require that individuals engage in such activity. That is not a difference in degree, but instead a difference in kind. It is a line that Congress has never crossed and the courts have never sanctioned.
In fact, the Supreme Court in United States v. Lopez (1995) rejected a version of the commerce power so expansive that it would leave virtually no activities by individuals that Congress could not regulate. By requiring Americans to use their own money to purchase a particular good or service, Congress would be doing exactly what the court said it could not do.
Some have argued that Congress may pass any legislation that it believes will serve the "general welfare." Those words appear in Article I of the Constitution, but they do not create a free-floating power for Congress simply to go forth and legislate well. Rather, the general welfare clause identifies the purpose for which Congress may spend money. The individual mandate tells Americans how they must spend the money Congress has not taken from them and has nothing to do with congressional spending.
A second constitutional defect of the Reid bill passed in the Senate involves the deals he cut to secure the votes of individual senators. Some of those deals do involve spending programs because they waive certain states' obligation to contribute to the Medicaid program. This selective spending targeted at certain states runs afoul of the general welfare clause. The welfare it serves is instead very specific and has been dubbed "cash for cloture" because it secured the 60 votes the majority needed to end debate and pass this legislation.
A third constitutional defect in this ObamaCare legislation is its command that states establish such things as benefit exchanges, which will require state legislation and regulations. This is not a condition for receiving federal funds, which would still leave some kind of choice to the states. No, this legislation requires states to establish these exchanges or says that the Secretary of Health and Human Services will step in and do it for them. It renders states little more than subdivisions of the federal government.
This violates the letter, the spirit, and the interpretation of our federal-state form of government. Some may have come to consider federalism an archaic annoyance, perhaps an amusing topic for law-school seminars but certainly not a substantive rule for structuring government. But in New York v. United States (1992) and Printz v. United States (1997), the Supreme Court struck down two laws on the grounds that the Constitution forbids the federal government from commandeering any branch of state government to administer a federal program. That is, by drafting and by deliberate design, exactly what this legislation would do.
The federal government may exercise only the powers granted to it or denied to the states. The states may do everything else. This is why, for example, states may have authority to require individuals to purchase health insurance but the federal government does not. It is also the reason states may require that individuals purchase car insurance before choosing to drive a car, but the federal government may not require all individuals to purchase health insurance.
This hardly exhausts the list of constitutional problems with this legislation, which would take the federal government into uncharted political and legal territory. Analysts, scholars and litigators are just beginning to examine the issues we have raised and other issues that may well lead to future litigation.
America's founders intended the federal government to have limited powers and that the states have an independent sovereign place in our system of government. The Obama/Reid/Pelosi legislation to take control of the American health-care system is the most sweeping and intrusive federal program ever devised. If the federal government can do this, then it can do anything, and the limits on government power that our liberty requires will be more myth than reality.
Mr. Hatch, a Republican senator from Utah, is a former chairman of the Senate Judiciary Committee. Mr. Blackwell is a senior fellow with the Family Research Council and a professor at Liberty University School of Law. Mr. Klukowski is a fellow and senior legal analyst with the American Civil Rights Union.
If the government can mandate the purchase of insurance, it can do anything.
The Wall Street Journal, page A11, Jan 02, 2009
President Obama's health-care bill is now moving toward final passage. The policy issues may be coming to an end, but the legal issues are certain to continue because key provisions of this dangerous legislation are unconstitutional. Legally speaking, this legislation creates a target-rich environment. We will focus on three of its more glaring constitutional defects.
First, the Constitution does not give Congress the power to require that Americans purchase health insurance. Congress must be able to point to at least one of its powers listed in the Constitution as the basis of any legislation it passes. None of those powers justifies the individual insurance mandate. Congress's powers to tax and spend do not apply because the mandate neither taxes nor spends. The only other option is Congress's power to regulate interstate commerce.
Congress has many times stretched this power to the breaking point, exceeding even the expanded version of the commerce power established by the Supreme Court since the Great Depression. It is one thing, however, for Congress to regulate economic activity in which individuals choose to engage; it is another to require that individuals engage in such activity. That is not a difference in degree, but instead a difference in kind. It is a line that Congress has never crossed and the courts have never sanctioned.
In fact, the Supreme Court in United States v. Lopez (1995) rejected a version of the commerce power so expansive that it would leave virtually no activities by individuals that Congress could not regulate. By requiring Americans to use their own money to purchase a particular good or service, Congress would be doing exactly what the court said it could not do.
Some have argued that Congress may pass any legislation that it believes will serve the "general welfare." Those words appear in Article I of the Constitution, but they do not create a free-floating power for Congress simply to go forth and legislate well. Rather, the general welfare clause identifies the purpose for which Congress may spend money. The individual mandate tells Americans how they must spend the money Congress has not taken from them and has nothing to do with congressional spending.
A second constitutional defect of the Reid bill passed in the Senate involves the deals he cut to secure the votes of individual senators. Some of those deals do involve spending programs because they waive certain states' obligation to contribute to the Medicaid program. This selective spending targeted at certain states runs afoul of the general welfare clause. The welfare it serves is instead very specific and has been dubbed "cash for cloture" because it secured the 60 votes the majority needed to end debate and pass this legislation.
A third constitutional defect in this ObamaCare legislation is its command that states establish such things as benefit exchanges, which will require state legislation and regulations. This is not a condition for receiving federal funds, which would still leave some kind of choice to the states. No, this legislation requires states to establish these exchanges or says that the Secretary of Health and Human Services will step in and do it for them. It renders states little more than subdivisions of the federal government.
This violates the letter, the spirit, and the interpretation of our federal-state form of government. Some may have come to consider federalism an archaic annoyance, perhaps an amusing topic for law-school seminars but certainly not a substantive rule for structuring government. But in New York v. United States (1992) and Printz v. United States (1997), the Supreme Court struck down two laws on the grounds that the Constitution forbids the federal government from commandeering any branch of state government to administer a federal program. That is, by drafting and by deliberate design, exactly what this legislation would do.
The federal government may exercise only the powers granted to it or denied to the states. The states may do everything else. This is why, for example, states may have authority to require individuals to purchase health insurance but the federal government does not. It is also the reason states may require that individuals purchase car insurance before choosing to drive a car, but the federal government may not require all individuals to purchase health insurance.
This hardly exhausts the list of constitutional problems with this legislation, which would take the federal government into uncharted political and legal territory. Analysts, scholars and litigators are just beginning to examine the issues we have raised and other issues that may well lead to future litigation.
America's founders intended the federal government to have limited powers and that the states have an independent sovereign place in our system of government. The Obama/Reid/Pelosi legislation to take control of the American health-care system is the most sweeping and intrusive federal program ever devised. If the federal government can do this, then it can do anything, and the limits on government power that our liberty requires will be more myth than reality.
Mr. Hatch, a Republican senator from Utah, is a former chairman of the Senate Judiciary Committee. Mr. Blackwell is a senior fellow with the Family Research Council and a professor at Liberty University School of Law. Mr. Klukowski is a fellow and senior legal analyst with the American Civil Rights Union.
The States and the Stimulus - How a supposed boon has become a fiscal burden
The States and the Stimulus. WSJ Editorial
How a supposed boon has become a fiscal burden.
The Wall Street Journal, page A10, Saturday, January 2, 2010
Remember how $200 billion in federal stimulus cash was supposed to save the states from fiscal calamity? Well, hold on to your paychecks, because a big story of 2010 will be how all that free money has set the states up for an even bigger mess this year and into the future.
The combined deficits of the states for 2010 and 2011 could hit $260 billion, according to a survey by the liberal Center on Budget and Policy Priorities. Ten states have a deficit, relative to the size of their expenditures, as bleak as that of near-bankrupt California. The Golden State starts the year another $6 billion in arrears despite a large income and sales tax hike last year. New York is literally down to its last dollar. Revenues are down, to be sure, but in several ways the stimulus has also made things worse.
First, in most state capitals the stimulus enticed state lawmakers to spend on new programs rather than adjusting to lean times. They added health and welfare benefits and child care programs. Now they have to pay for those additions with their own state's money.
For example, the stimulus offered $80 billion for Medicaid to cover health-care costs for unemployed workers and single workers without kids. But in 2011 most of that extra federal Medicaid money vanishes. Then states will have one million more people on Medicaid with no money to pay for it.
A few governors, such as Mitch Daniels of Indiana and Rick Perry of Texas, had the foresight to turn down their share of the $7 billion for unemployment insurance, realizing that once the federal funds run out, benefits would be unpayable. "One of the smartest decisions we made," says Mr. Daniels. Many governors now probably wish they had done the same.
Second, stimulus dollars came with strings attached that are now causing enormous budget headaches. Many environmental grants have matching requirements, so to get a federal dollar, states and cities had to spend a dollar even when they were facing huge deficits. The new construction projects built with federal funds also have federal Davis-Bacon wage requirements that raise state building costs to pay inflated union salaries.
Worst of all, at the behest of the public employee unions, Congress imposed "maintenance of effort" spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes.
One provision prohibits states from cutting Medicaid benefits or eligibility below levels in effect on July 1, 2008. That date, not coincidentally, was the peak of the last economic cycle when states were awash in revenue. State spending soared at a nearly 8% annual rate from 2004-2008, far faster than inflation and population growth, and liberals want to keep funding at that level.
A study by the Evergreen Freedom Foundation in Seattle found that "because Washington state lawmakers accepted $820 million in education stimulus dollars, only 9 percent of the state's $6.8 billion K-12 budget is eligible for reductions in fiscal year 2010 or 2011." More than 85% of Washington state's Medicaid budget is exempt from cuts and nearly 75% of college funding is off the table. It's bad enough that Congress can't balance its own budget, but now it is making it nearly impossible for states to balance theirs.
These spending requirements come when state revenues are on a downward spiral. State revenues declined by more than 10% in 2009, and tax collections are expected to be flat at best in 2010. In Indiana, nominal revenues in 2011 may be lower than in 2006. Arizona's revenues are expected to be lower this year than they were in 2004. Some states don't expect to regain their 2007 revenue peak until 2012.
So when states should be reducing outlays to match a new normal of lower revenue collections, federal stimulus rules mean many states will have little choice but to raise taxes to meet their constitutional balanced budget requirements. Thank you, Nancy Pelosi.
This is the opposite of what the White House and Congress claimed when they said the stimulus funds would prevent economically harmful state tax increases. In 2009, 10 states raised income or sales taxes, and another 15 introduced new fees on everything from beer to cellphone ringers to hunting and fishing. The states pocketed the federal money and raised taxes anyway.
Now, in an election year, Congress wants to pass another $100 billion aid package for ailing states to sustain the mess the first stimulus helped to create. Governors would be smarter to unite and tell Congress to keep the money and mandates, and let the states adjust to the new reality of lower revenues. Meanwhile, Mr. Perry and other governors who warned that the stimulus would have precisely this effect can consider themselves vindicated.
How a supposed boon has become a fiscal burden.
The Wall Street Journal, page A10, Saturday, January 2, 2010
Remember how $200 billion in federal stimulus cash was supposed to save the states from fiscal calamity? Well, hold on to your paychecks, because a big story of 2010 will be how all that free money has set the states up for an even bigger mess this year and into the future.
The combined deficits of the states for 2010 and 2011 could hit $260 billion, according to a survey by the liberal Center on Budget and Policy Priorities. Ten states have a deficit, relative to the size of their expenditures, as bleak as that of near-bankrupt California. The Golden State starts the year another $6 billion in arrears despite a large income and sales tax hike last year. New York is literally down to its last dollar. Revenues are down, to be sure, but in several ways the stimulus has also made things worse.
First, in most state capitals the stimulus enticed state lawmakers to spend on new programs rather than adjusting to lean times. They added health and welfare benefits and child care programs. Now they have to pay for those additions with their own state's money.
For example, the stimulus offered $80 billion for Medicaid to cover health-care costs for unemployed workers and single workers without kids. But in 2011 most of that extra federal Medicaid money vanishes. Then states will have one million more people on Medicaid with no money to pay for it.
A few governors, such as Mitch Daniels of Indiana and Rick Perry of Texas, had the foresight to turn down their share of the $7 billion for unemployment insurance, realizing that once the federal funds run out, benefits would be unpayable. "One of the smartest decisions we made," says Mr. Daniels. Many governors now probably wish they had done the same.
Second, stimulus dollars came with strings attached that are now causing enormous budget headaches. Many environmental grants have matching requirements, so to get a federal dollar, states and cities had to spend a dollar even when they were facing huge deficits. The new construction projects built with federal funds also have federal Davis-Bacon wage requirements that raise state building costs to pay inflated union salaries.
Worst of all, at the behest of the public employee unions, Congress imposed "maintenance of effort" spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes.
One provision prohibits states from cutting Medicaid benefits or eligibility below levels in effect on July 1, 2008. That date, not coincidentally, was the peak of the last economic cycle when states were awash in revenue. State spending soared at a nearly 8% annual rate from 2004-2008, far faster than inflation and population growth, and liberals want to keep funding at that level.
A study by the Evergreen Freedom Foundation in Seattle found that "because Washington state lawmakers accepted $820 million in education stimulus dollars, only 9 percent of the state's $6.8 billion K-12 budget is eligible for reductions in fiscal year 2010 or 2011." More than 85% of Washington state's Medicaid budget is exempt from cuts and nearly 75% of college funding is off the table. It's bad enough that Congress can't balance its own budget, but now it is making it nearly impossible for states to balance theirs.
These spending requirements come when state revenues are on a downward spiral. State revenues declined by more than 10% in 2009, and tax collections are expected to be flat at best in 2010. In Indiana, nominal revenues in 2011 may be lower than in 2006. Arizona's revenues are expected to be lower this year than they were in 2004. Some states don't expect to regain their 2007 revenue peak until 2012.
So when states should be reducing outlays to match a new normal of lower revenue collections, federal stimulus rules mean many states will have little choice but to raise taxes to meet their constitutional balanced budget requirements. Thank you, Nancy Pelosi.
This is the opposite of what the White House and Congress claimed when they said the stimulus funds would prevent economically harmful state tax increases. In 2009, 10 states raised income or sales taxes, and another 15 introduced new fees on everything from beer to cellphone ringers to hunting and fishing. The states pocketed the federal money and raised taxes anyway.
Now, in an election year, Congress wants to pass another $100 billion aid package for ailing states to sustain the mess the first stimulus helped to create. Governors would be smarter to unite and tell Congress to keep the money and mandates, and let the states adjust to the new reality of lower revenues. Meanwhile, Mr. Perry and other governors who warned that the stimulus would have precisely this effect can consider themselves vindicated.
Thursday, December 31, 2009
Tackling Insurgency
Tackling Insurgency. By K C Dixit
IDSA, Dec 29, 2009
IDSA, Dec 29, 2009
Military operations must aim at creating a sense of security by preventing insurgent depredations on the people, and forcing misguided elements to seek an honourable negotiated settlement. Our conventional training philosophy, which is based on dehumanizing a man, motivating him with an ardent regimental spirit and building in him a very specific image bordering on arrogance and flamboyance, is not ideally suited to carry out counter-insurgency operations. Thus, changes in attitudes are mandatory to achieve the primary objective of winning over the hearts and minds of the people. But sudden transitions are always difficult to manage, since it will often mean discarding conventional military wisdom. In fact, military hawks usually term it as appeasement or a live and let live approach adopted by weak-kneed commanders. Hence, reorientation training for counter insurgency environment is mandatory both for political masters and the army.
Even at the tactical level, there is scope for refinement. It must be remembered that during the conduct of operations, tactical successes are necessary to retain initiative, to maintain morale and motivational levels of own troops and to force the insurgents to remain always on the run. But if tactical operations are executed in an uncontrolled manner, they directly contribute to the achievement of insurgent strategy of creating a sea of hostility. Thus, there exists a contradiction. We must accept that fighting back is a fundamental human instinct, and even soldiers will retaliate in self defence if their own survival is threatened by insurgents and their supporters, notwithstanding clear directives to field commanders to attempt apprehension of hostiles first, and open fire when hostiles resist or attempt escape. Anyone will retaliate, if their own survival is at stake. Therefore, it must be emphasized during training that security forces are carrying out extremely delicate tasks under serious tactical constraints. Patience and perseverance are the prime requirements in such scenarios. Also security forces must develop consummate, calculative and deft, tactical, psychological and political sophistication to come up with correct answers to numerous unforeseen situations that can crop up in an insurgency environment; be it during ambushes, or search operations, or interrogation of hostiles or their supporters, or innocent civilians. Unfortunately, it is unrealistic and impractical to produce templates for application.
We need to re-confirm if employment of army using conventional concepts and infantry tactics but with restrictions on the use of fire power is the only answer? Obviously, the answer to the problem, particularly in the initial stages of insurgency, is the first step and must start with the identification of the problem and accurate visualization of pattern of insurgent operations to include their initial, intermediate and final objectives. Furthermore, their capabilities must be accurately reviewed and tasks likely to be executed correctly identified. Of course, the overall aim of all clandestine and subversive activities would be to expand their influence over people by attraction or coercion with a view to assert their credibility in the minds of masses and to gain initiative in the military field. Expressed in terms of tasks, all insurgent activities include: guerilla operations to acquire military capability and ascendancy, recruitment to expand politico-military base, tax and ration collection to sustain expanding capability, selective killings to coerce non-partisans to extend support and political initiatives to gain and widen external and internal support. Perforce, security forces’ tactical operations must be designed to combat such insurgent activities with least inconvenience to the people and contain insurgency. Therefore, counter insurgency operations automatically include: population control and denial, psychological operations, civic action programmes and search, ambush and raid missions to isolate and capture insurgents and destroy their camps. In such a complex situation, conduct of uncontrolled operations usually results in real and contrived excesses and loss of credibility. Thus, ironically excessive use of military force by uninitiated commanders and troops will always be counter-productive and must never be attempted.
To amplify further, general cordon and search operations are usually counter-productive and need to be replaced by selective cordon and search operations conducted on the basis of real time actionable intelligence, to prevent causing avoidable harassment and humiliation to people. Furthermore, excessive employment of road opening parties, convoy escorts and other security measures, particularly curfew restrictions, though defensive by nature, are not only counter-productive but also offer lucrative targets to the insurgents to inflict casualties and achieve their overall strategy. Therefore tactical operational activity should only be directed at insurgents and their active collaborators/ sympathizers with least disturbance caused to neutral and friendly people. Of course, intelligence capability will be the most vital Key Result Area to conduct such operations. Logic automatically dictates employment of special forces, operating from designated firm bases, to launch surprise strikes aimed at capturing maximum number of insurgents and arms or destroying their camps, vis-Ã -vis conduct of large scale and un-controlled operations during the initial stage. However, during later stages of insurgency, if guerrilla activity gets widespread, there is a need to move into open conventional warfare. In both situations, the army will be forced to counter insurgent activity adopting conventional tactics with restricted fire power, but once again supported by a psychological warfare effort. The overall object will continue to remain winning over the hearts and mind of the people.
Commanders and troops must understand that they are operating in a ‘No Win’ situation and their overall aim will always remain achievement of a more perfect peace. It simply implies that there is no such thing as a quick military victory. Conduct of counter-insurgency campaigns will invariably extend over a number of years. None should attempt to achieve ‘quick-end’ results, particularly by excessive use of force. Excessive use of force is counter-productive and must be avoided. Patience, perseverance, warmth and genuineness must be displayed by totally committed, dedicated and motivated leadership at all levels. Undeniably, counter-insurgency environment demands a very high order intellectual acumen unimagined ever before in conventional setting. Since it is a ‘No Win’ situation, performance evaluation may not be based on head count of number of insurgents captured/ destroyed and weapons captured or on number of hearts and minds won over. At the same time there is no room for ‘Zero Error’ or ‘live and let live’ approach to the problem. Such is the nerve racking complexity of the problem that the need for ensuring correct type of mental conditioning at all levels assumes vital significance. Fighting insurgency in this backdrop tends to create tremendous pressure on the minds of security forces’ personnel due to contradictory requirements and as such needs to be addressed appropriately at various levels.
Inside Our 'Secret' Afghan Prisons - A Navy SEAL and a Harvard-trained lawyer take charge of U.S. detention policy
Inside Our 'Secret' Afghan Prisons, by Willy Stern
A Navy SEAL and a Harvard-trained lawyer take charge of U.S. detention policy.
The Weekly Standard, Jan 04, 2010
A Navy SEAL and a Harvard-trained lawyer take charge of U.S. detention policy.
The Weekly Standard, Jan 04, 2010
Kabul, Afghanistan
Amanula is a cold-blooded killer. But the 26-year-old unemployed tractor driver doesn't look the part. Rail thin with spindly arms, Amanula wears his black hair long, and his unkempt bangs often hang over his eyes. When you can see them, his coal-black eyes reveal a sad and contemplative man, resigned to his fate.
Like most villagers in craggy, dirt-poor Paktika province in southeastern Afghanistan, Amanula is illiterate. The local mullah in Waza Khawa encouraged this young Pashtun to join in the fight against the infidels. On a crisp day in November, Amanula and three companions rode their Honda motorbikes high into the mountains to attack an American convoy. He was already a veteran of such lethal missions and had been on three in the previous month alone. His small unit carried a lot of weaponry to the fight: dynamite, a pressure plate IED trigger, a heavy machine gun, AK-47 assault rifles, a Chinese grenade, and even a rocket launcher.
Their target was a convoy of American military vehicles snaking their way through the treacherous mountain passes not far from the Pakistan border. Amanula's team quietly set up its deadly ambush. The morning was crystal clear--and eerily quiet.
Then a U.S. Army Apache attack helicopter escorting the convoy spotted Amanula's crouching team and let loose with a hail of 30-caliber machine gun fire. Within seconds, two of Amanula's accomplices were dead, sliced to bits. A bullet entered Amanula's forearm and lodged in his bicep. Dazed with pain, he clutched his AK-47 for comfort. Within minutes, he heard an American soldier--an Army sergeant actually--screaming at him in a language he didn't understand. He put his hands over his head, the universal sign of surrender. His last surviving colleague made a different choice and aimed the rocket launcher at the young American soldier. The insurgent was rapidly dispatched by the sergeant's M249 machine gun.
The sergeant faced a decision as old as war itself. He had captured an enemy combatant and had to do something with him. The options haven't changed much since Alexander the Great rampaged through Afghanistan in 329 B.C.: Let the enemy go and give him the chance to kill you tomorrow; execute him on the spot; or give him quarter and take him prisoner. In keeping with U.S. policy, the recognized laws of armed conflict, and all sense of civilized society, the sergeant took option three. In short order, he disarmed Amanula, put flex cuffs on his wrists, and gave him emergency medical care, actually stemming the bleeding by using Amanula's torn white shirt to bandage his arm. The soldier called for a Medevac helicopter and, within 35 minutes, Amanula found himself under a doctor's care at an American forward operating base, some 25 miles northward. Amanula had become a "detainee," held legally as an enduring security threat in a war zone. After his medical treatment, he was moved to a small detention facility at another forward operating base.
The facility where Amanula was held is known in military parlance as a Field Detention Site (FDS). Both the New York Times and the Washington Post have run breathless stories in recent weeks alleging that there exist secret facilities in Afghanistan operating outside the rule of law--although the correspondents were far from certain just what facilities they were writing about. No matter. "Afghans Detail Detention in 'Black Jail' at U.S. Base" read the Times's headline. The Post featured two Afghan teenagers who said they had been "beaten by American guards, photographed naked, deprived of sleep and held in solitary confinement in concrete cells for at least two weeks while undergoing daily interrogation about their alleged links to the Taliban." Rashid, 15, claimed "his interrogator forced him to look at pornography alongside a photograph of his mother."
I have been in two Field Detention Sites, and there was absolutely nothing "black" about them. They are spartan, to be sure, with the detainees housed in small, private cells built out of simple plywood inside a nondescript and unlabeled container. (Many American soldiers sleep in similar containers.) The interrogation rooms are similar--a small table with three chairs, also fashioned out of plywood, much like what your local Cub Scout troop would bang out during a carpentry project.
There are five or six such cells in each facility. One site that I visited was empty; the other had a single detainee. This is typical. Detainees are given a mat, blanket, and three meals, at least one of which is hot. On one cell wall is a single piece of white paper with handwritten directions and a simple picture indicating the direction to face to pray towards Mecca. On another wall is part of the Geneva Conventions translated into Dari and Pashto. A prayer mat and bottled water are provided. Detainees are given medical treatment. Lights stay on 24/7--there is no individual lighting for each cell--but that practice is common in any U.S. prison where there is need for frequent safety and security checks. (The one detainee I saw was sleeping soundly on a cushioned mat, under a thick brown blanket, despite the lights being on. A half-drunk bottle of water and his white Kandahari hat were on the floor, next to his shoes.)
Amanula's testimony contrasts with the stories in the Times and Post. Amanula was given a private room at the FDS--while his American captors slept in bunk beds, 20-to-a-canvas tent--and interviewed thoroughly by a trained Army interrogator, working through an Afghan translator. The interrogator hardly looked like a U.S. soldier; he wore jeans, longish hair, and a thick beard. Under questioning in accord with Army Field Manual rules, Amanula provided his captors with a wealth of intelligence about other terrorist cells operating in the area. He gave up the names of specific Taliban members in the region, details of the techniques used by the insurgents, even mullahs and mosques who were working with the Taliban.
Within a few days, Amanula was relocated to a larger detention facility, the Bagram Theater Internment Facility (BTIF). Located on Bagram Airfield, the large military base north of Kabul at the base of the Hindu Kush, the BTIF sits inside a large yellow hangar built by the Soviets in the early 1980s. Last week the BTIF was closed, and all detainees transferred to the new $60 million Detention Facility in Parwan (DFIP)--also located at Bagram.
So why are the mainstream media, human rights groups, and civil libertarians all bent out of shape about the Field Detention Sites? Attribute it to the secrecy. The locations of the FDSs are secret. This is just plain common sense in a war zone. How else can you maintain operational security? Why tell the bad guys--who, after all, are trying to kill our soldiers--where their friends are being held? Some of these facilities are out in the hinterlands where our forces are stretched thin. Public knowledge of the FDS locations would put both our soldiers and the detainees at risk. But for reporters from the Times and the Post, secrecy means there must be something illegal going on.
But the Defense Department takes the secrecy a little too far, generally not allowing any media access to the facilities or even letting them be discussed on-the-record. This policy breeds conspiracy theories, gives rise to outlandish conjecture, and presents an alluring news hook for every muckraking scribe who is all too willing to publish detainees' uncorroborated tales of abuse.
There's a good chance that this less-than-necessary secretiveness will pass away in 2010. So far in Afghanistan the Field Detention Sites have been under the command of whichever military unit controlled that battle space. But in early January, Joint Task Force 435, a unit stood up last September and focused entirely on detentions and interrogations, will assume control over almost all of the American-run detention facilities in Afghanistan. And General Stanley McChrystal's counterinsurgency strategy puts a premium on winning Afghan hearts and minds as much as defeating the Taliban on the battlefield.
An enlightened and tough, if frazzled and sleep-deprived group, Task Force 435 is heavy on scholarly attorneys and counterinsurgency gurus. Its mantras are transparency and accountability. During two weeks embedded with 435, I was taken to two "secret" Field Detention Sites, two Afghan prisons--including the infamous Pol-i-Charkhi--and a counternarcotics detention facility. I saw hundreds of detainees--not just in their cells but wandering the halls of the cell blocks and out in the recreation yards. I saw conjugal visit huts (made of hardened mud, but certainly private enough) and visited with a detainee being treated for diabetes in the medical unit.
I met dozens of detainees, was often invited back into their group cells for tea (I always declined), and made chitchat with those who had some English. Did any complain of abuse? No. Is this proof that here is no abuse? Of course not, but it's a pretty decent indicator. I was briefed on classified detainee files--on the condition that actual names not be used in print--and was allowed to interview a wide array of prison employees, including interrogators, guards, wardens, and even a psychologist. Most of these interviews were unmonitored, including on-the-record and unofficial talks with two translators who work in the interrogation rooms. I asked for details on a juvenile detainee, and they were immediately provided. Planned trips to visit prisons in Herat and Kandahar were cancelled because of bad weather and the limitations military aircraft face with low cloud cover hanging over the Afghan mountain ranges.
The brain trust of this new openness is Vice Admiral Bob Harward, who heads up Task Force 435, and his deputy, Brigadier General Mark Martins. Harward, a hard-charging Navy SEAL, is a legend in the Special Forces community. (He has a long scar down his left cheek--"from a knife fight" he says without elaborating.) An engaging commander, Harward, 53, cusses like the sailor he is when hanging with the troops but can produce an admiral's spit-and-polish when needed--an engaging combination in a commander. He seems not to have an ounce of body fat and combines decent Farsi with a strategic mind.
Martins, 49, is another hard-charger. He was valedictorian of his West Point class, a Rhodes Scholar who earned a First at Oxford, and a magna cum laude graduate of Harvard Law School. The Seal and the Solicitor are less of an odd couple than one might think. For one, they are both gifted athletes (Martins has run the Marine Corps Marathon in 2:44) and exude an easy command presence. And they urgently want to upgrade the detentions and interrogations situation in Afghanistan. As Harward notes: "Perception is reality."
They both talk a lot about transparency--you hear that word about 50 times a day--but aren't able fully to practice what they preach. Official DoD policy mostly prohibits taking media into the large detention facility at Bagram, and does not allow public discussion of the even more secretive detention facility at Bagram: the Temporary Screening Facility (TSF). The Joint Special Operations Command apparently controls the TSF today; there's been no public indication to date when or how it will come under Task Force 435's oversight. Asked how he can preach transparency and yet not oversee the TSF, Harward declines to even acknowledge the facility's existence. Instead, he says, "I've been made responsible for all detention operations in Afghanistan, and I fully intend to fulfill that mission." There's little doubt that Harward and Martins are lobbying tactfully behind the scenes to gain oversight of the facility.
And make no mistake: Task Force 435's mission is essential. General Stanley McChrystal laid out the issue fairly starkly in his August assessment of the Afghan war:
There are more insurgents per square foot in corrections facilities than anywhere else in Afghanistan. Unchecked, Taliban/Al Qaeda leaders patiently coordinate and plan, unconcerned with interference from prison personnel or the military.
Detainees have cell phones, money, and influence. They control wide swaths of the Afghan prisons today, and they are radicalizing the other inmates.
FIELD DETENTION SITES
Despite the regular flow of stories about torture and black sites, few members of the press have been inside any of the Afghan prisons or attempted to understand the country's detainee structure. There are four separate parts to it, which in theory can take an insurgent from the battlefield through rehabilitation back into society: the Field Detention Sites; the Bagram Theater Internment Facility, which has just been replaced by the DFIP; the Temporary Screening Facility; and the Afghan-run correctional system.
There are nine FDSs in Afghanistan, mostly located in the southern and eastern parts of the country, where the insurgency is strongest. They are on forward operating bases, residing in unmarked containers. Scores of soldiers walk by them every day and have no idea what's on the other side of the metal wall. They all have a small entrance area where IDs are checked. In addition to five or six cells--divided by no more than a thick piece of plywood--most have a medical room, an open area, a small recreation yard, and an interview room. Adjacent to the interview room is another small room with a one-way mirror for observation purposes.
The interrogators, who all work in plainclothes, have done intensive 18-week interrogation courses and stick to the 19 approved methods of interrogation in the Army Field Manual (the law since the Detainee Treatment Act was passed in 2005). None of these methods includes torture or cruel, inhuman, or degrading treatment. This gets hammered home hard throughout the American-run prisons.
The Red Cross can visit these facilities but does not have access to the detainees. Many of the detainees are released after initial interrogations and screenings to determine their status. The U.S. military has no obligation at this point to report their whereabouts to the Red Cross, but if they are held longer, the Red Cross is informed.
Nobody displays names or ranks on their uniforms inside an FDS. Special Forces operators, whose work is often clouded in secrecy and who use fake names, even with a visiting general, staff many of the tiny facilities. But "we have absolutely nothing to hide from anybody," says Colonel John Garrity, the straight-talking military police officer in charge of the large Bagram detention facility, as well as the man responsible for investigating any charges of abuse at the FDSs.
I'm not supposed to talk policy but if I had my way, we'd open up every damn facility to the media and anybody else who wanted to have a look. These are quality facilities run by trained professionals. You'll find worse problems at prisons in the U.S., but the secrecy here creates crazy myths. We have nothing--absolutely nothing--to hide from anybody. I am proud of our facilities and so would anybody else who has spent time inside them.
The policy of secrecy is clearly eating away at Colonel Garrity--and with good reason.
The average stay of a detainee at an FDS is six days. Some are released almost immediately, others are transferred to the Afghan police, and the rest begin moving within 10 days to the larger facilities at Bagram. Amanula was transferred to Bagram seven days after surrendering.
THE BAGRAM THEATER INTERNMENT FACILITY
Until last week, when the DFIP came on line, detainees sent to Bagram went to the Bagram Theater Internment Facility (BTIF). This facility held about 720 detainees. By comparison, at the height of the 2007 surge, we had some 27,000 detainees locked up in Iraq, and during the British campaign in Malaya from 1948 to 1960--the counterinsurgency oft cited as the most successful--nearly half-a-million people from a much smaller population pool were detained.
The BTIF was actually two facilities enclosed in one space behind walls and concertina wire. The larger of the two facilities, inside the former Soviet hangar, held two matching sets of 16 group cells (detainees sleep about 20 to a cell), as well as interrogation booths, and medical facilities. Prisoners lived in open cages with wire mesh tops for easy inspection by guards. Guards walked on a long wooden platform that runs above the cages, and a bright yellow sign on the raised platform reads "No Female Guards Beyond This Point."
In both the shuttered BTIF and the new DFIP there is at least one open latrine per cell and a group shower area with individual stalls. Detainees wear bright orange jumpsuits--making it awfully hard for them to escape unnoticed--as a sign of shame, and white caps. When it's cold (and it was cold in Afghanistan in December), they are issued blue knit caps. They have access to bottled water. When they have drunk a bottle, they may exchange it for a full one. This is a necessary security protocol as detainees have been known to cut the bottles in half and use them as weapons, or even to scoop up and throw feces at the guards. If their behavior warrants, they are rewarded with juice boxes, the same ones (apple, orange, pineapple) that are served in the dining facilities on the military base.
Prisoners have access to 40-inch HDTVs. Recently a soccer game was being shown, and when the camera panned to a crowd shot, a woman with much exposed skin came into view, jumping up and down. The shot offended many of the Muslim detainees, yet seemed to give furtive pleasure to others.
There were no windows and therefore no natural light for the detainees inside the massive BTIF hangar, a legitimate source of concern to Red Cross inspectors and a problem corrected at the new DFIP. In back of the hanger was what the troops call the "K-Span"--a hundred-foot-long Quonset hut where the hardcases were housed in segregation cells.
At least half the guards at the BTIF have had feces thrown at them, a standard way for detainees to act out, according to Chief Matthew Lacy, a Navy Guard Force commander. Corporal Kevin Johnson, 18, told me, "Yesterday, I had a guy throw urine on me, but he then apologized to me and said it was meant for another guard." (Johnson in less than five months at the BTIF has taught himself Pashto, the language of most of the detainees he looks after.) Some detainees regularly call the black MPs "niggers." The MPs, who work 12-hour shifts, complain frequently about their long hours but not about the abuse they take. They are trained not to respond to such taunting, and any claim of guard abuse is documented and investigated.
The average detainee stay at the facility is 24 months. The average weight gain is 36 pounds. For most, it is the first time in their lives they have had adequate food and access to health care. Most arrive illiterate, and many depart with elementary reading skills after taking classes in the facility. This is an effective counterinsurgency tactic; giving an insurgent the ability to read allows him access to a wider world than the narrow radical Islamic society in which most were raised. The ability to pursue independent thought should not be underestimated in this tribal society.
The clampdown on the media at Bagram hasn't just encouraged negative stories but has kept positive coverage under wraps. An internal U.S. Army document--self-serving, to be sure--reveals much decent treatment at the BTIF. There is the detainee diagnosed by an American doctor with pancreatic cancer and given compassionate release so he could spend his last days with his family. Before he left, the dying man of his own accord went from cell to cell in the facility telling his fellow detainees how decent his captors had been. Or take the young Army specialist from Missouri who oversees the segregation cells in the K-Span. He and the eight men under his care sing to each other in Pashto at bedtime, the melodies carrying through the metal cell doors. He continues his serenade each night until every detainee is asleep.
There were abuses at the BTIF in the early years of the Afghan conflict. At least two Afghans died in U.S. custody. Task Force 435 absolutely won't talk about it, but multiple interviews with other military officials, translators, private contractors, consultants, and prison experts paint a grim picture. The CIA conducted these early interrogations. Some interrogators were cowboys, and many of the military police units in the facilities in the early years were reservists--with limited training--who followed the lead of the confident CIA guys. Apparently, when CIA operators left for the day, some would tell the reservists "to soften 'em up for us before tomorrow." There is no evidence that such abuse continues today with a trained guard force.
DETENTION FACILITY IN PARWAN
Colonel Garrity was granted permission to show the unopened facility to the media in mid-November, and scores of articles and photos--some glowing, some skeptical--appeared. It's a modern wonder, replete with huge cells, basketball hoops in the recreation yard, expensive optometrist equipment, a state-of-the-art X-ray machine, and a large vocational-technical training area to help with the detainee's reintegration to society. In a bizarre twist, after the detainees are transferred in early 2010, they will have far nicer digs than the soldiers who guard them. The soldiers will continue to live in cramped canvas tents and walk long distances outside through mud to get to the latrine or shower.
The new facility has great public relations value and will aid the 435's quest for transparency. But the DFIP is also so overdone as to be borderline ridiculous. The ultimate plan is to hand over management of the facility to the Afghans, and it's a safe bet that the power tools and medical equipment will quickly be stolen and sold. What are the chances that the modern surveillance cameras and integrated computer system will still work in 10 years in this third-world country where many farmers still use oxen and Iron Age tools? A clear sign that the facility is not sustainable: The power outlets at the 40-acre facility run on the American 110-volt system, not the Afghan grid.
The detainees at the DFIP are carefully screened. A small fraction--the hard cases--are being designated for fledgling deradicalization programs. Experts are studying similar programs in places like Saudi Arabia and Singapore to adapt them for the Afghan culture. Reintegration programs--vocational training, literacy programs, etc.--will be broadly administered to almost the entire population according to individual plans drawn up for each detainee.
"But reintegration plans are still very much in the early stages," reports Marisa Porges, a fellow at the Council on Foreign Relations with an expertise in the rehabilitation of terrorists. She's just back from visiting the facilities in Afghanistan. Efforts are underway, says Porges, "to both design and implement programs simultaneously, which is a good sign and shows they're being aggressive." For example, moderate mullahs are working with the detainees.
THE TEMPORARY SCREENING FACILITY
This is the site that doesn't officially exist. Nobody on Task Force 435 will acknowledge it. No matter. It does exist, and it is at Bagram Airfield. It's the controversial facility over which Admiral Harward is apparently seeking jurisdiction.
The TSF, though, is hardly as sinister as it sounds. Military operations in Afghanistan legitimately require what is essentially a way station for detainees who are being screened before they are released or transferred (either to the large Bagram detention facility or directly to the Afghan prison system). It is here that Special Operations Forces interrogate detainees, just as they do at the Field Detention Sites. The Joint Special Forces Command, which reportedly runs the secret facility, is less interested in transparency than in maintaining operational and tactical secrecy in wartime. There are valid arguments on both sides of the issue, a fact not lost on Harward or Martins. While transparency is needed to win Afghan hearts and minds and is a key component of McChrystal's counterinsurgency strategy, it can also aid the insurgents by revealing surveillance techniques. (I've learned of many such techniques--clever but not illegal--in my time here.) If you were a Special Forces interrogator doing your job just fine would you really want another layer of bureaucrats--including a bunch of uptight lawyers--looking over your shoulder?
But many Pashtuns in southern Afghanistan cite disappearances into the "occupier's black jail" as a good reason to pick up an AK-47 and fight the Karzai government, or try to blow up our troops on patrol. That's the reason transparency makes good sense today. It's the smart way to stop alienating the population. The facility may be top secret but any scribe could easily confirm its existence by taking a quick look Maqaleh v. Gates, a case in the Federal District Court for the District of Columbia; the government's brief appealing the decision refers quite openly to a "temporary screening and processing" facility.
THE AFGHAN PRISONS
After capture and screening, many detainees are transferred into the Afghan criminal justice system for prosecution. I visited three Afghan-run prisons--Pol-i-Charkhi in eastern Kabul just beyond the Kabul River; the Jalalabad Prison in eastern Afghanistan on the corridor leading to the Khyber Pass; and Kabul's new Counter-Narcotics Justice Center.
Compare Pol-i-Charkhi or Jalalabad with a prison in Kentucky and the Afghan facilities look downright awful. Prisoners are cramped up to 18 to a small cell. The sewage system is often no more than a hole in the floor to an open trench, reliant on gravity to move the mess downhill and away from the cells. Hundreds of people were lined up outside Pol-i-Charkhi on visiting day, many with wheelbarrows piled high with food since food service inside is largely nil. At the Jalalabad Prison, the inmates sleep inside but the guards are forced to sleep outside, even in the snow, due to lack of funds to build even a single guard shack.
But compare these facilities with prisons in Africa or elsewhere in central Asia, and they look okay. There are lots of Americans floating around the facilities--corrections consultants hired by the State Department and even U.S. marshals with crew cuts and blue windbreakers. They work hard to assure proper standards. And there isn't any evidence of the torture, beatings, whippings, and rape that are standard fare in third-world prisons.
Pol-i-Charkhi has a past. It's estimated that the Afghan Communists executed 27,000 people in this hellhole--mostly political enemies--after the Soviet invasion in 1979. The main facility is built on a pin-wheel design, with the cell units forming the spokes of the wheel. I walked through one such block where the general population was housed, as well as through an open recreation yard. Dozens of prisoners could have easily walked up and attacked me. Instead, they wanted to shake hands and share tea.
To be sure, there is a separate facility at Pol-i-Charkhi, called the U-10, where the most dangerous prisoners are held. It is here that you'll find the Taliban leaders who led a riot and took over two cell blocks in 2008. Still even these violent prisoners wander freely around their cell block, meandering among the bright red garbage cans that dot the long second-floor hallway. The day I visited, several wanted to practice their English; they were polite, to be sure--and no doubt knew the consequences of creating trouble. The U-10 facility is on par with any maximum-security prison in the United States, in large part because Western contractors built it, and U.S. taxpayers fund it. It's worth noting the United States has already spent $16 million to refurbish and update Pol-i-Charkhi, one cell block at a time. Construction of a vocational tech-training center--part of Task Force 435's reintegration strategy--was underway when I visited.
There are bright spots in the Afghan system. The women's prison at Jalalabad is spacious, with doe-eyed children frolicking in the courtyard on a blue swing set, slide, and seesaw. There's also a small classroom and a huge pile of American toys--think Spiderman dolls--donated by aid groups in the United States.
Then there's the recently built Counter-Narcotics Justice Center. Inmates sleep two-to-a-room on bunk beds, and every cell has its own semi-private bathroom area. The cells I saw were clean--with toothbrushes and toothpaste left out on a shelf. A modern kitchen and industrial-sized laundry round out the facility. The recreation yard, though, isn't much to see. It's outdoors, to be sure, but is nothing more than a long narrow cage where detainees squatted on their haunches, huddled under wool blankets to ward off the winter air. Still, the facility is so nice that many accused criminals with political connections pull strings to win admission.
Corruption is a constant aspect of the Afghan prison system. Sarah Chayes, author of a brilliant book on the guileful nature of Afghan politics post-Taliban, Punishment of Virtue, believes that corruption takes at least three forms in the prison system. (Chayes, who has lived in Kandahar for the last seven years working to rebuild homes and establish an agricultural collective, serves as a special adviser to the NATO military command.) First of all, she says, top Afghan officials strive to have their rivals or enemies sent to prison and the best way of achieving this is by deliberately providing inaccurate information to international military or intelligence officers. Second, imprisonment in Afghanistan is often simply a kidnapping racket, with releases obtained for a "bribe." Finally, Chayes notes that corrupt officials and other criminals with ties to those at the summit of the Afghan government use their pull to get out of jail.
Task Force 435 has no real power within the Afghan prison system, and so the corruption will remain. Another weak link in the chain is the corruption of the greater Afghan judicial system, notes General Martins--judges, policemen, guards, etc. But the task force must play the hand it's been dealt. They don't complain--at least not much.
One of Task Force 435's most serious challenges is in its efforts to deradicalize detainees and reintegrate them into Afghan society.
Take the case of 16-year-old Abul-Aziz--the lone juvenile in detention at BTIF today. Educated in a radical madrassa in Pakistan and effectively an orphan, he's a quick study. (When he was picked up in September, Abul-Aziz was already proficient in four languages.) It quickly became apparent that the babyfaced Abul-Aziz had regular contact with senior members of the Islamic Movement of Uzbekistan (IMU)--a terrorist group operating in Afghanistan, knew the exact location of IMU safe houses, and had received advanced combat training. Although it's legal to hold him under the laws of armed conflict, he's still just a kid. On the day he was picked up, he was trying to get his cell phone fixed and went into a village to have his photo taken before a Muslim holiday. Can he be deradicalized? This is the sort of question that Admiral Harward and General Martins are trying to tackle.
With others, there is virtually no hope of getting them to lay down their arms. Agha-Gul is a senior Taliban commander with a shaved head and thick black beard. He was nabbed in late 2005 in a Kabul taxicab with $13,000 in Euros and British pounds. A courier who traveled among Afghanistan, Pakistan, Iran, and Europe, Agha-Gul has ties to multiple attacks on coalition forces. He was entirely uncooperative during interrogations and will likely be held indefinitely as "an enduring security threat."
Since 2002, about 4,000 individuals have been detained; more than 2,500 have been released. Task Force 435 would like to release many more. General Martins can often be found in his windowless office after midnight scouring detainee files for clues that could lead to eventual reintegration. "Information that reveals apparent motives for violence," he says, "is often helpful in developing a reintegration plan or path for an individual detainee." Martins is thorough. He also looks at the circumstances of the capture, the strength of evidence, local community and tribal history, sectarian and political dimensions, the detainee's cooperation, his behavior in detention and even the willingness of his home village to have a detainee back.
But before any detainees are released, they appear before a controversial body known as a Detainee Review Board (DRB). This panel of three field-grade military officers conducts administrative hearings for each detainee. The detainee does not have access to a civilian lawyer, but is instead guided both before and during his hearing by a military officer who advocates on his behalf. Human rights groups contend this is wrong.
But as one task force officer notes:
I would hate to have on my conscience the deaths of well-intentioned but naïve civil liberties lawyers who've been beheaded by Taliban while scouring Kunar province for evidence of their clients' innocence. So we may be in for some criticism on this score in the end. There are some things that require common sense, and armed conflict is one of them.
At least a third of the nation's 34 provinces are in armed conflict. A lot of folks are getting killed. In any event, as required by law and policy, every detainee receives an in-person hearing before the DRB within 60 days of arrival at Bagram and gets a further review every six months.
The DRB is required to consider all "reasonably available" evidence, a qualifier easy to understand in a war zone where collecting evidence often exposes soldiers and Marines to getting killed. The military is also required to chase down all exculpatory leads offered by a detainee who claims he was unjustly nabbed. It's not a perfect system, but it is not a terrible one either.
How can we tell if we are winning this war? One litmus test is the complex case of a detainee named Jalaludin. Relatively well educated--he completed the 11th grade--the 35-year-old had a well-paying job as the number two officer on a security detail. His job was to protect the construction workers who were building a much-needed road through Kunar Province in eastern Afghanistan. This area is a stronghold of Hezb-e-Islami insurgents. (The U.S. taxpayer is funding the road, one of thousands of such reconstruction projects here that get little coverage.)
Although Jalaludin was not directly involved in attacks on coalition forces in his area, he allowed the Taliban to sneak its fighters and weapons through his security checkpoints and, worse, he had advance knowledge of terrorist attacks on coalition forces that he failed to report--hardly acceptable behavior for a top-level security officer. He was arrested based on strong evidence and quickly admitted his guilt. He now is held at the DFIP and says he desperately misses his family.
We know of Jalaludin and his uncertain future only because the new task force on detentions believes the U.S. military has nothing to hide and saw the value in opening up its doors to a visiting scribe. It's a gamble, to be sure, but a good one. In a country where virtually every issue is shrouded in uncertainty, bedeviled by deadly complexity and riddled with corruption, this much is certain: The good faith, soundness, and humanity of Joint Task Force 435's mission are unassailable. The men and women of 435 are committed to a humane and open detentions system, one that is rooted in the rule of law and grounded in basic American values.
Will these become Jalaludin's values? After all, says Martin, he wasn't
a trigger puller or actually part of the insurgent force. I've looked carefully at the evidence and spoken directly with Jalaludin. I think he's an accidental guerrilla, someone drawn into the larger conflict by influences that have little to do with the larger political struggle.
Martins thinks Jalaludin is "an important case study" since "he appears to represent a class of current detainees who, if swayed not to oppose the government, could be decisive in isolating insurgent groups and ending the armed conflict."
Ultimately, this broader conflict will be won not only on the battlefield, but also in the hearts and minds of men like Jalaludin. If he comes over to our side we'll know we're winning the war.
Willy Stern, an adjunct professor at Vanderbilt University's Law School, embedded with Task Force 435 in Afghanistan in December 2009.
Questions for Abdulmutallab - The would-be airplane bomber needs to be interrogated
Questions for Abdulmutallab. By VICTORIA TOENSING
The would-be airplane bomber needs to be interrogated.
WSJ, Dec 31, 2009
On the third day after Umar Farouk Abdulmutallab's attempt to blow up a Detroit-bound airliner, President Barack Obama finally interrupted his Hawaiian vacation to announce that our government "will not rest until we find all who were involved and hold them accountable." But how are we going to do that now that the terrorist is lawyered up and is even challenging what should be a legal gimme: giving the government a DNA sample?
It was not wise to try enemy combatants such as Zacarias Moussaoui, the so-called 20th hijacker in the 9/11 attacks, in our regular criminal courts. And it is unwise that Mr. Obama has decided to try some Guantanamo detainees in New York City. Never in our country's history prior to 2001 have we done so, for good reason.
The constitutional protections designed to ensure a person is not wrongfully convicted have no relevance to wartime military needs. The argument that our system is strong enough to try a terrorist is a non sequitur. It equates to the argument that if a person is in excellent health, she can withstand being set ablaze.
Moussaoui tied the Virginia federal court in knots for over three years, principally by insisting on the Brady rule, which requires that the defendant be given access to any evidence that could be exculpatory. (Moussaoui was convicted because he pleaded guilty, not because there was a trial and jury decision.)
The Brady rule is a needed constitutional protection for the accused bank robber, where the government wants to produce only the one witness who identifies the defendant as the perpetrator but not the other six witnesses who cannot identify him. It does not work where a terrorist demands access to all the servicemen and women who witnessed his capture on the battlefield.
Yet even the legal issues of a trial are of little importance compared to the threat to our security putting this terrorist into the regular criminal justice system presents. Abdulmutallab is in effect in possession of a ticking bomb, but we cannot interrogate him. His right to remain silent, as required by the Miranda rule, thwarts Mr. Obama's hollow attempt on Tuesday to "assure" us he is "doing everything in [his] power" to keep us safe.
Questions need to be answered. Where was Abdulmutallab trained? Who trained him? Where is the training facility located? Where is the stash of PETN, the explosive used in the bomb? What are the techniques he was told to use for getting through airport security? Was there a well-dressed man who helped him board the plane without a passport as claimed by another passenger? And, most important, are future attacks planned?
Yes, we could try him first and then interrogate him. But by then the information is stale, especially if he utilizes the same legal challenges Moussaoui did to drag out the process for years.
As the president told us, there were indeed "human and systemic failures" that "contributed to this potential catastrophic breach of security." By placing this terrorist into the regular criminal process, he continues and magnifies those failures, which could leave to an actual catastrophe.
Abdulmutallab is not a United States citizen. By detonating a bomb on an airplane filled with 269 civilians, he committed an illegal act of war. A military commission, which has been used for such conduct since Gen. George Washington, will give him due process. But first, he must be interrogated.
Ms. Toensing was deputy assistant attorney general in the Reagan administration, where she supervised all terrorist cases.
The would-be airplane bomber needs to be interrogated.
WSJ, Dec 31, 2009
On the third day after Umar Farouk Abdulmutallab's attempt to blow up a Detroit-bound airliner, President Barack Obama finally interrupted his Hawaiian vacation to announce that our government "will not rest until we find all who were involved and hold them accountable." But how are we going to do that now that the terrorist is lawyered up and is even challenging what should be a legal gimme: giving the government a DNA sample?
It was not wise to try enemy combatants such as Zacarias Moussaoui, the so-called 20th hijacker in the 9/11 attacks, in our regular criminal courts. And it is unwise that Mr. Obama has decided to try some Guantanamo detainees in New York City. Never in our country's history prior to 2001 have we done so, for good reason.
The constitutional protections designed to ensure a person is not wrongfully convicted have no relevance to wartime military needs. The argument that our system is strong enough to try a terrorist is a non sequitur. It equates to the argument that if a person is in excellent health, she can withstand being set ablaze.
Moussaoui tied the Virginia federal court in knots for over three years, principally by insisting on the Brady rule, which requires that the defendant be given access to any evidence that could be exculpatory. (Moussaoui was convicted because he pleaded guilty, not because there was a trial and jury decision.)
The Brady rule is a needed constitutional protection for the accused bank robber, where the government wants to produce only the one witness who identifies the defendant as the perpetrator but not the other six witnesses who cannot identify him. It does not work where a terrorist demands access to all the servicemen and women who witnessed his capture on the battlefield.
Yet even the legal issues of a trial are of little importance compared to the threat to our security putting this terrorist into the regular criminal justice system presents. Abdulmutallab is in effect in possession of a ticking bomb, but we cannot interrogate him. His right to remain silent, as required by the Miranda rule, thwarts Mr. Obama's hollow attempt on Tuesday to "assure" us he is "doing everything in [his] power" to keep us safe.
Questions need to be answered. Where was Abdulmutallab trained? Who trained him? Where is the training facility located? Where is the stash of PETN, the explosive used in the bomb? What are the techniques he was told to use for getting through airport security? Was there a well-dressed man who helped him board the plane without a passport as claimed by another passenger? And, most important, are future attacks planned?
Yes, we could try him first and then interrogate him. But by then the information is stale, especially if he utilizes the same legal challenges Moussaoui did to drag out the process for years.
As the president told us, there were indeed "human and systemic failures" that "contributed to this potential catastrophic breach of security." By placing this terrorist into the regular criminal process, he continues and magnifies those failures, which could leave to an actual catastrophe.
Abdulmutallab is not a United States citizen. By detonating a bomb on an airplane filled with 269 civilians, he committed an illegal act of war. A military commission, which has been used for such conduct since Gen. George Washington, will give him due process. But first, he must be interrogated.
Ms. Toensing was deputy assistant attorney general in the Reagan administration, where she supervised all terrorist cases.
Wednesday, December 30, 2009
The Price for Fannie and Freddie Keeps Going Up
The Price for Fannie and Freddie Keeps Going Up. By PETER J. WALLISON
Barney Frank's decision to 'roll the dice' on subsidized housing is becoming an epic disaster for taxpayers.
WSJ, Dic 30, 2009
On Christmas Eve, when most Americans' minds were on other things, the Treasury Department announced that it was removing the $400 billion cap from what the administration believes will be necessary to keep Fannie Mae and Freddie Mac solvent. This action confirms that the decade-long congressional failure to more closely regulate these two government-sponsored enterprises (GSEs) will rank for U.S. taxpayers as one of the worst policy disasters in our history.
Fannie and Freddie's congressional sponsors—some of whom are now leading the administration's effort to "reform" the financial system—have a lot to answer for. Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, sponsored legislation adopted in 2008 that established a new regulatory structure for the GSEs. But by then it was far too late. The GSEs had begun buying risky loans in 1993 to meet the "affordable housing" requirements established under congressional direction by the Department of Housing and Urban Development (HUD).
Most of the damage was done from 2005 through 2007, when Fannie and Freddie were binging on risky mortgages. Back then, Mr. Frank was the bartender, denying that there was any cause for concern, and claiming that he wanted to "roll the dice" on subsidized housing support.
In 2005, the Senate Banking Committee, then controlled by Republicans, adopted tough regulatory legislation that would have established more auditing and oversight of the two agencies. But it was passed out of committee on a partisan vote, and with no Democratic support it never came to a vote.
By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages and mortgage-backed securities (MBS)—risky loans with a total principal balance of $1.6 trillion. These are now defaulting at unprecedented rates, accounting for both their 2008 insolvency and their growing losses today. Since 2008, under government control, the two agencies have continued to buy dicey mortgages in order to stabilize housing prices.
There is more to this ugly situation. New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.
In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.
An Alt-A mortgage is one in which the quality of the mortgage or the underwriting was deficient; it might lack adequate documentation, have a low or no down payment, or in some other way be more likely than a prime mortgage to default. Fannie and Freddie were also reporting these mortgages as prime, according to Mr. Pinto.
It is easy to see how this misrepresentation was a principal cause of the financial crisis.
Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks.
In addition, about 7.7 million subprime and Alt-A housing loans were in mortgage pools supporting MBS issued by Wall Street banks—which had long before been driven out of the prime market by Fannie and Freddie's government-backed, low-cost funding. The vast majority of these MBS were rated AAA, because the rating agencies' models assumed that the losses that are incurred by subprime and Alt-A loans would be within the historical range for the number of high-risk loans known to be outstanding.
But because of Fannie and Freddie's mislabeling, there were millions more high-risk loans outstanding. That meant default rates as well as the actual losses after foreclosure were going to be outside all prior experience. When these rates began to show up early in 2007, it was apparent something was seriously wrong with assumptions on which AAA ratings had been based.
Losses, it was now certain, would invade the AAA tranches of the mortgage-backed securities outstanding. Investors, having lost confidence in the ratings, fled the MBS market and ultimately the market for all asset-backed securities. They have not yet returned.
By the end of 2007, the MBS market collapsed entirely. Assets once carried at par on financial institutions' balance sheets could not be sold except at distress prices. This raised questions about the stability and even the solvency of most of the world's largest financial institutions.
The first major victim was Bear Stearns, the smallest of the five major Wall Street investment banks but one invested heavily in risky MBS. The government rescue of Bear Stearns in March 2008 signaled that the U.S. government, and perhaps others, would stand behind other large financial institutions. The moral hazard this engendered was deadly when Lehman Brothers' solvency came under challenge. Spreads in the credit default swap market for Lehman, despite massive short-selling, showed very little alarm by investors until just before the fateful weekend of Sept. 13 and 14, when they blew out on fears that the firm might not be rescued.
By that time it was too late for Lehman's counterparties to take the protective action that might have cushioned the shock. As it turned out, however, none of Lehman's largest counterparties failed—so much for the idea that the financial market is "interconnected"—but all market participants now realized they had to know the true financial condition of their counterparties. The result was a freeze-up in interbank lending.
For most people, that freeze-up is the beginning of the financial crisis. But its roots go back to 1993, when Fannie and Freddie began stocking up on subprime and other risky loans while reporting them as prime.
Why Fannie and Freddie did this is still to be determined. But the leading candidate is certainly HUD's affordable housing regulations, which by 2007 required that 55% of all the loans the agencies acquired had to be made to borrowers at or below the median income, with almost half of these required to be low-income borrowers.
Another likely reason for Fannie and Freddie's mislabeling of mortgages was their desire to retain congressional support by "rolling the dice" while making believe they weren't betting. With the Federal Housing Administration, Wall Street investment banks, and Fannie and Freddie all competing for these loans, the bottom of the barrel had long before been scraped and the financial system set up for a crisis.
Mr. Wallison is a senior fellow at the American Enterprise Institute.
Barney Frank's decision to 'roll the dice' on subsidized housing is becoming an epic disaster for taxpayers.
WSJ, Dic 30, 2009
On Christmas Eve, when most Americans' minds were on other things, the Treasury Department announced that it was removing the $400 billion cap from what the administration believes will be necessary to keep Fannie Mae and Freddie Mac solvent. This action confirms that the decade-long congressional failure to more closely regulate these two government-sponsored enterprises (GSEs) will rank for U.S. taxpayers as one of the worst policy disasters in our history.
Fannie and Freddie's congressional sponsors—some of whom are now leading the administration's effort to "reform" the financial system—have a lot to answer for. Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, sponsored legislation adopted in 2008 that established a new regulatory structure for the GSEs. But by then it was far too late. The GSEs had begun buying risky loans in 1993 to meet the "affordable housing" requirements established under congressional direction by the Department of Housing and Urban Development (HUD).
Most of the damage was done from 2005 through 2007, when Fannie and Freddie were binging on risky mortgages. Back then, Mr. Frank was the bartender, denying that there was any cause for concern, and claiming that he wanted to "roll the dice" on subsidized housing support.
In 2005, the Senate Banking Committee, then controlled by Republicans, adopted tough regulatory legislation that would have established more auditing and oversight of the two agencies. But it was passed out of committee on a partisan vote, and with no Democratic support it never came to a vote.
By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages and mortgage-backed securities (MBS)—risky loans with a total principal balance of $1.6 trillion. These are now defaulting at unprecedented rates, accounting for both their 2008 insolvency and their growing losses today. Since 2008, under government control, the two agencies have continued to buy dicey mortgages in order to stabilize housing prices.
There is more to this ugly situation. New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.
In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.
An Alt-A mortgage is one in which the quality of the mortgage or the underwriting was deficient; it might lack adequate documentation, have a low or no down payment, or in some other way be more likely than a prime mortgage to default. Fannie and Freddie were also reporting these mortgages as prime, according to Mr. Pinto.
It is easy to see how this misrepresentation was a principal cause of the financial crisis.
Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks.
In addition, about 7.7 million subprime and Alt-A housing loans were in mortgage pools supporting MBS issued by Wall Street banks—which had long before been driven out of the prime market by Fannie and Freddie's government-backed, low-cost funding. The vast majority of these MBS were rated AAA, because the rating agencies' models assumed that the losses that are incurred by subprime and Alt-A loans would be within the historical range for the number of high-risk loans known to be outstanding.
But because of Fannie and Freddie's mislabeling, there were millions more high-risk loans outstanding. That meant default rates as well as the actual losses after foreclosure were going to be outside all prior experience. When these rates began to show up early in 2007, it was apparent something was seriously wrong with assumptions on which AAA ratings had been based.
Losses, it was now certain, would invade the AAA tranches of the mortgage-backed securities outstanding. Investors, having lost confidence in the ratings, fled the MBS market and ultimately the market for all asset-backed securities. They have not yet returned.
By the end of 2007, the MBS market collapsed entirely. Assets once carried at par on financial institutions' balance sheets could not be sold except at distress prices. This raised questions about the stability and even the solvency of most of the world's largest financial institutions.
The first major victim was Bear Stearns, the smallest of the five major Wall Street investment banks but one invested heavily in risky MBS. The government rescue of Bear Stearns in March 2008 signaled that the U.S. government, and perhaps others, would stand behind other large financial institutions. The moral hazard this engendered was deadly when Lehman Brothers' solvency came under challenge. Spreads in the credit default swap market for Lehman, despite massive short-selling, showed very little alarm by investors until just before the fateful weekend of Sept. 13 and 14, when they blew out on fears that the firm might not be rescued.
By that time it was too late for Lehman's counterparties to take the protective action that might have cushioned the shock. As it turned out, however, none of Lehman's largest counterparties failed—so much for the idea that the financial market is "interconnected"—but all market participants now realized they had to know the true financial condition of their counterparties. The result was a freeze-up in interbank lending.
For most people, that freeze-up is the beginning of the financial crisis. But its roots go back to 1993, when Fannie and Freddie began stocking up on subprime and other risky loans while reporting them as prime.
Why Fannie and Freddie did this is still to be determined. But the leading candidate is certainly HUD's affordable housing regulations, which by 2007 required that 55% of all the loans the agencies acquired had to be made to borrowers at or below the median income, with almost half of these required to be low-income borrowers.
Another likely reason for Fannie and Freddie's mislabeling of mortgages was their desire to retain congressional support by "rolling the dice" while making believe they weren't betting. With the Federal Housing Administration, Wall Street investment banks, and Fannie and Freddie all competing for these loans, the bottom of the barrel had long before been scraped and the financial system set up for a crisis.
Mr. Wallison is a senior fellow at the American Enterprise Institute.
Monday, December 28, 2009
Regulatory structure: lessons to learn from corporate life
Is important the regulator institutional structure? Lessons to learn from corporate life. By A J R, contributing blogger
Dec 28, 2009
Dec 28, 2009
It is inevitable that those working in the FIs area, or academics studying them, think that the institutional structure of the regulatory agency is very important. Abrams and Taylor (2002) put things in perspective, we think, remarking that the structure tasks are second order issues. They come after various conditions are in their right place, and are done with the right degree of intent and effort.
If the institutional structure is important (and it is, just we should remember that it is something to work on after other things are to our satisfaction) is, mainly, because the wrong organization can ruin the best team we can gather, or the best set of conditions chosen, or the best laws written.
We are told than when structure is weak, many undesirable effects can appear: monitorization is less effective or comprehensive than possible; regulatory arbitrage is more frequent; promised economies of scale are not realized; deployment of staff is not optimal; too many disputes among regulators (or among units of a unified regulator) happen; costs for the taxpayer are too large. To solve those effects (and others) perceived as caused by structure weakness, various models are proposed for regulators and supervisors, depending of particular conditions. Before any change is made, in one direction of the other, some considerations on the prerequisites for an effective supervisory structure must be added. Abrams and Taylor (2002) very cautiously think that this list, which doesn't aim to be exhaustive, "attempts to provide an indicative set of key features that constitute an effective supervisory structure":
objectives should be clear: if possible mandated by statute to prevent the supervisory process from costing too much to the financial system or the taxpayer - which is the unavoidable path to follow, since the regulator is risk-averse and is not commended by the lack of crises but is pilloried when some occurs;
independent and accountable regulator: again with the support of a statute that protects managers from being deposed by politicians easily and with some mechanism to make the agency accountable to both the taxpayer and to industry (this seems very difficult to execute to us);
regulation must be cost effective;
resources must be adequate: ability to "recruit, train and retain a cadre" of skilled personnel;
effective & flexible enforcement powers: ability to require information from regulated firms, to assess the competence and probity of senior management and owners, and to take appropriate graduated sanctions;
regulation must be comprehensive: regulators must also be in a position to respond quickly to market innovations;
the Effectiveness Criteria. we should consider also whether other solutions are more effective or less risky, and that perhaps changes may be inappropriate due to current events.
Models of regulatory structure
The WB (2005) noted: "the institutional structure of regulatory agencies is an issue of some significance. However, the importance should not be exaggerated." We cannot be too critical with any system (specific cases of jobs badly botched can and must be criticized). And we do not think that the US or the UK systems are clearly superior to other systems, or as bad as critics say. In corporations the structure is being changed constantly, according to the needs and what is learnt. This includes the partition of the company in several ones, and after a time a reorganization that again concentrates some pillars into one (in some cases leaving just one company).
According to Rustomjee (2009), the new preference among countries for unified approaches to supervision and regulation "suggest[s]" that some governments have "identified useful advantages in the unified models of regulation." We think that it is better this nuanced formulation than a previous one in the same text ("in the past decade a number of countries have shifted towards more unified regulatory arrangements, suggesting that there may be important advantages in unified models of regulation"). We don't know for sure what is best, and if corporate life is any indication, the best organization is an elusive goal. And if one reaches that blissful state of best organization, it lasts a very short time period. Maybe it was just herd behaviour? Or subtle pressures from the EU guys that have power on this area?
A great variety of regulatory structures can be observed today. We can try to adscribe this wide range of approaches to these three categories:
Multiple-agency regulators
Due to history, political structure (e.g., a federation) or sheer size (e.g. the US), the regulator can be highly fragmented, paying attention to just a specific financial sector activity (e.g., independent regulators for banks, for insurance companies and for securities firms).
The case par excellence is the US. A great critic of this model is Brown (2007). Spain is a similar case, although not that greatly fragmented. The Bank of Spain works with banks and S&L Associations; a Treasury directorate general with insurance companies; and an independent commision with the stock market and securities firms.
In the WB study (2005) this model represented 42% of all countries in the study.
Common regulators
In this case, a regulator supervises two of the three major financial activities. Examples in which a single agency works on banks and securities firms are Finland, Luxembourg or Switzerland. This comprised 6% of the countries in the WB study (2005).
Examples in which a single agency works on banks and insurance companies are Belgium and Canada (comprising 12% of countries). Examples in which a single regulator supervises securities firms and insurers are Chile, Slovakia or South Africa (11% of countries).
Unified regulators
This case includes some varieties: if all existing regulators are merged into a single institution we are talking about the fully unified one. A close case (although preserving the central bank), is the UK's FSA.
Sometimes, instead of working on the institutions being regulated, the supervisors are split on two or more: an institution for prudential supervision of all entities, a separate institution for supervision of market conduct. If split into two, this is known as the ‘twin peaks’ model. The two cases are Australia and the Netherlands.
Some small population countries (and countries that recently entered into the EU) follow this model; notable cases are Austria, Denmark, Norway, and Sweden. More notable because of their population size and large economy are Germany, Japan, and the UK. Of the countries studied, 29% had a unified regulator system.
Some advantages of unification with disadvantages added
Paraphrasing the World Bank (2005), there is merit in the arguments for a unified model, but also several good reservations may be stated. And Abrams and Taylor (2002) offer good comments about, 1 the risks and unpredictability of the very change itself (you can end up with a system weaker than the original one due to bargaining and political capture), and 2 the risks of qualified, experienced staff turnover in their Box 6.1.
A regulator that mirrors the conglomerates' structure should monitor more effectively the full range of activities of such complex organizations. Why is this assumed to refer to unification? First of all, corporations frequently divide themselves in fully independent national groups, comprised in turn of several companies. In several countries you can find IBM itself (which has several divisions), IBM GBS, IBM Global Finance, IBM Data and a couple others. Of course, auditing units and risk management divisions are multiplied almost accordingly. Never it was intended to have all audit sections fully unified. Maybe lawmakers and supervisors need to ask themselves why corporate life is so different. Or can we be sure that private firms are so wrong on so many areas? And second, although firms have diversified, their core business keeps being dominant in the overwhelming majority of cases. The risks nature is different enough to warrant different prudential supervisory regimes, and there would be few (if any) efficiencies in bringing their supervision together.
The regulator can be understood and recognized as such by regulated firms and individuals. Moral hazard can increase: many may understand that all creditors protected by a supervisor will receive equal protection.
The regulator should "avoid problems" of duplication, gaps, inconsistencies, and competitive inequality that can arise with a regime that is based on several institutions. Maybe that "avoid" is too optimistic? Could be better to say "reduce"? And second, such regulator that could "avoid" inconsistencies, overlaps and duplication could become excessively bureaucratic and slow to confront changes in the financial world.
The single agency should minimize regulatory arbitrage (e.g., the placement of a financial product in that part of a conglomerate where the supervisory oversight is lowest). This arbitrage also can induce “competition in laxity,” or rush to the bottom. This last is not necessarily bad if the regulatory regime is not a corrupt one. It is not clear that contention of state growth is counter to the people's interests, and some argue otherwise.
Economies of scale can be gained (particularly with respect to skill requirements and recruitment of staff members). A single regulator might be more efficient because of shared resources (like shared IT systems). This might apply particularly to the “small-country” case (and small financial sector case). So maybe Australia, the Scandinavian countries and other small population countries can get the much heralded economies of scale, but these are almost ruled out by the WB in cases like the US and the UK. Besides, economies of scale, as in corporate life, may not happen, and X-inefficiencies may arise.
Deployment of staff members within a unified agency should be optimal, compared to the specialist and fragmented regulator. Experience in the corporate world says this same and the opposite.Rustomjee (2009, p. 34), shows this was not done well at the UK's FSA. Besides, that advantage can quickly disappear past some size limit.
If expertise in regulation is in short supply, expertise might be used more effectively if concentrated within a single agency, which also might offer better career prospects. Wrongly done, it could reduce prestige of the better workers, who may leave for the private sector.
Accountability of regulation also might be more certain with a simple structure if for no other reason than that it would be more difficult for different agencies to “pass the buck.” This can also happen among units of any organization. Besides, accountability might be more difficult if clear objectives are not defined, and definition of those in a single regulator can be more difficult to attain.
The costs imposed on regulated firms might be reduced if firms need to deal with just one agency; economies and greater effectiveness can be gained when all information about financial firms is within a single supervisor. Also there are opportunities for increased corruption, and more homogeneity of methods, computer models and even of vision, which runs counter to Alexander-Dhumale-Eatwell's description of increased homogeneity's dangers.
More complete coverage can be obtained, with less organizations slipping through the supervisory net because of confusion about which regulator is responsible. There should be less damaging disputes between agencies in a multiple-agency structure. Those happen frequently among any organization's units, regardless of size or structure.
A danger of a fragmented supervisor is that similar products are regulated differently because they are supplied by different types of financial firms, diminishing competitive neutrality. On the other hand, a single regulator could loss valuable information and a degree of competition and diversity in regulation – the case for not having a single regulator is alike that against any monopoly.
The WB authors recognize that the arguments for and against single prudential supervisors are "finely balanced, and the optimal structure is likely to vary between countries," depending on the country size, political considerations, past practices, and the structure of their financial system (i.e., whether it is comprised of conglomerate or specialized institutions).
The US: fragmented regulator
The US system is a cobweb of regulators created upon a confederation of states, each with its own rights of supervision in its own territory. This complex system has a good record of financial innovation are quite a big legacy of financially-driven prosperity than many other countries did not enjoy. Geithner (2008) argued that the regulatory system in the US has become
"a confusing mix of diffused accountability, regulatory competition, an enormously complex web of rules that create perverse incentives and leave huge opportunities for arbitrage and evasion, and creates the risk of large gaps in our knowledge and authority."
Among the many criticisms voiced against this system we can mention:
There is not enough emphasis in systemic risk management.
Not enough attention was given to conduct-of-business regulation. We think that the states do quite a decent job protecting the consumer.
FIs avoided supervision thru the establishment of SVIs and conduits to keep operations off-balance-sheet. Here we disagree a bit: everybody knew this was happening, just it was thought of as a clever way to deal with risks. But it was not done with the regulator unaware of this.
Little coordination resulted from the excessively fragmented structure, in which there was no lead agency. This had some effect in the crisis' genesis, but would like to add that the fact of not having such a leading supervisor is was a result sought by the lawmaker both in the federation and the states, afraid of concentration of power. This fear is an important consideration in the US.
The system didn't keep pace with market and technology innovation. Again, the lawmaker and the supervisors were aware of these developments, and thought them beneficial. And countries with a large, modern, sophisticated financial system with all technological means like Japan did experience a much softer banking crisis (although GDP took a great hit later).
The US regulator was surpassed by institutional innovation, like globalized, despecialized conglomerates, which exercised great regulatory arbitrage, avoiding capital adequacy and other limitations. But the BCBS taught that all single-family mortgages were much less risky than any commercial loan (regardless of the collateral provided, Martin S Feldstein, 1993)). And the lawmaker, supervisors and market operators thought that the CRAs computed the right ratings for those MBSs. That's why they bought them: they made money while reducing compliance costs and were keeping risks, everybody thought, manageable (Stiglitz, Orszag & Orszag, 2002).
The system is too costly. Brown (2007, pp.60-61) says total US regulatory costs are 16 and 117 times, respectively, than those in UK and Germany. Few defended that the FSA was innefficient, but following Brown's reasoning, US costs = 16*UK, US costs = 117*Germany, dividing we get UK costs = 7 times Germany costs. Who complains of this? Obviously there are other criteria to consider. Later she computes more realistic factors (down to 4 and 14 in p. 63). We'd like to add this thought: if in Spain there are four and in the UK there are three institutions working on banking, insurance and securities regulation and supervision, I think we can put 3 as a good average number for the 25 members in the EU. That is 76 institutions for 25 countries and EU. It is not so crazy to have 115 in the US fifty states, other territories and the federation.
Many proposals to rationalize the US system and its 115 regulators were made in the last decades (US Treasury Department 2008, Appendix B). We find merit in thinking that incremental change, as proposed in the US Treasury blueprint (Chapter IV, Short-Term Recommendations, and Chapter V, Intermediate-Term Recommendations), is likely to result in a better regulatory system than too pasionate proposals like Brown's (2007).
But at the same time we see:
An almost complete lack of criticism with the very perverse incentives that the lawmaker created in the US for inter alia the GSEs and the FHA (and those other quasi-governmental enterprises, the CRAs) to securitize sub-prime and non-prime loans as low-risk ones (Friedman, 2009, pp130-132, pp143-146).
That the US Treasury proposal (2008, figure in p.144) maybe is a very reductionist one: making approving reference to the Australian case, the great heterogeneity of FIs in the US and the enormous differences in FIs and among a 300-million population country and tens-of-million populations in Australia, Nerderlands or Scandinavia are arguably not adequately accounted for. We think that is apparent the risk that the amount of knowledge that can be transferred from those unified regulator experiences to the US is small.
That the prudential supervision system built in the last decade worked apparently well in a very diverse group of countries in all continents, that is, many fragmented supervision systems did well in 2007-2009. This, incidentally, again stresses the first point, that is, wrong incentives by the lawmaker that were not present in other countries.
- Add to this that low-taxation, lighly regulated jurisdictions, like the OFCs, are doing well too.
In corporate life there are many subdivisions and duplicative structures, and they are purposefully so.
The UK: unified model
The Northern Rock and UK interbank lending crises, a period in which the BoE, the FSA and the Treasury didn't coordinate effectively and gave a sorry spectacle of decisions and counterdecisions (like accepting MBSs as collateral to provide LOLR support, and changing the rules of the deposit insurance system, making it wider and deeper), is an example of real operation of the fully unified regulatory model in a large, sophisticated system like the UK's when times are difficult. Where we should have seen efficiencies we got to varying degrees high staff turnover, lack of specialists, lack of training, and regulatory paralysis.
Indeed, we got not even accountability: we are not aware of many staff ousted in any of the three agencies. On the contrary, FSA's Turner directs almost no criticism to the regulators in his speeches, just to the easy targets, and FSA's Hector Sants (2009) spells the end of the light-touch regulator with no reference to Parliament – he also speaks of contracting hundreds of supervisors for his agency. In the end, the UK will get micromanagement and a large bureaucracy with a lot of personnel and new in-house complex models and supporting computer systems, ending the savings promised.
The WB (2005) report comments on the case of Ireland and Finland, where economies of scale in infrastructure, information technology, and services were achieved by locating the agencies at the same place and by sharing resources while "nevertheless, maintaining strict separation of regulatory and supervisory" policy and practice. This is not much discussed, but maybe some variation of these intermediate solutions could be considered.
Views from corporate life
Big global firms, like Siemens or IBM, with more than 350 000 employees/contractors, have organizational problems according to their size and worldwide presence. As example: in corporate life there is a maxim about how individual divisions, project portfolios, businesses lines, products, activities, and people should be shed, and shed annually. Why is this constant pruning a rule? A reason is that there are no perfect institutional arrangements, activities, goals or teams. In the central banks and other supervisory agencies they talk (thru their officials' speeches) as if it were possible to find the perfect organization, and make it last indefinetely.
In those private, global, very dynamic organizations they live a constant review processes to make things better (although there is no much hope of ever arriving at the "this is the best organization" state). There are audits in several areas: "money" fraud (external fraud, internal controls, etc.), technological security (network security, computer security, physical access to buildings, laboratories, etc.), and quality assurance/risk management ("quality inspection" of software, of physical components, and of processes). There are several "internal affairs divisions," so to speak. That's why we cannot be too critical with the US system. Supervisory system, that is, because the lawmaker's wrong incentives are arguably worse than the too complex supervision.
This discovery program in corporations is arguably better fine tuned than what the lawmaker can design. We see no discussion about large companies "detectives" or "inspectors," or about structure reform programs, in the papers or speeches by central bankers. We see in central bankers, which work with really big companies (Sumitomo, Deutsche Bank), lack of awareness of the optimizing work permanently being done in the corporate world. This is in full display in the WB/IMF (2005) report. An exception seems to be the Walker Review (2009), that published a chapter on 'Governance of risk' on November which seems more acquainted with real corporate practice than other studies.
So yes, structure is important, but: 1 other things are first (the prerequisites of Abrams & Taylor supra), 2 those supervision tasks are also done in the supervised companies and in much bigger organizations and are seldom discussed and it seems few things are to be learnt from them, and 3 why do we think that legislative action can do a better, faster job of reforming structures than the reform processes in firms if those reforms are very, very difficult and need a constant re-work? We cannot say which of three seems more important to us.
Then, after so much conflicting data, so much questions, so few support from those in the "real world," so to speak, of corporations, why is there so much fuss about unification? Here we cannot avoid to be cynical. It is true than recent developments (financial services innovation and globalization, the emergence of international financial conglomerates, the lessons from repeated episodes of financial crisis in some countries, lessons of best (and worst) practice from other countries (WB, 2005), make an influence in the lawmaker and its counsels, but to us this very much seems a pendular experiment.
We wonder whether all this emphasis on unification could be one of those efforts by the lawmaker to appear as active (as it is demanded by the people), doing something after what happened in the 1987-2000 crisis, even if we need still more time to learn more about organization and structure.
If the lawmaker ends thinking that crises were not prevented by unified regulators like FSA, as also happened with the non-unified ones, soul-searching will start in earnest and the interest in unified regulators will fall out of favor.
Abrams, R and M Taylor (2002) ‘Issues in the Unification of Financial Sector Supervision’, Chapter 6 in Charles Enoch, David Marston and Michael Taylor (eds) Building Strong Banks Through Surveillance and Resolution, Washington, DC: International Monetary Fund.
[A previous version is downloadable in PDF: Abrams, Richard K. & Michael Taylor 2000 'Issues in the Unification of Financial Sector Supervision'. IMF Working Paper No. 00/213. Washington, DC: International Monetary Fund. http://www.imf.org/external/pubs/cat/longres.cfm?sk=3939.0]
Alexander K, R Dhumale and J Eatwell (2006) 'Global Governance of Financial Systems: The International Regulation of Systemic Risk'. Oxford: Oxford University Press.
Brown, Elizabeth (2007) ‘E Pluribus Unum – Out of Many: Why the United States Needs a Single Financial Services Agency’, University of Miami Business Law Review, Fall/Winter. Ask for a PDF.
Feldstein, M (1993), Comment to Boyd and Gertler (1993), p 375, in John Boyd & Mark Gertler, US Commercial Banking - Trends, Cycles and Policy, in NBER Macroeconomics Annual 1993, Volume 8, Olivier Blanchard and Stanley Fischer (eds), MIT Press. http://www.nber.org/chapters/c11003
Financial Stability Institute (2007) ‘Institutional Arrangements for Financial Sector Supervision’, Occasional Paper No. 7, Basel, Switzerland: Financial Stability Institute, BIS. http://www.bis.org/fsi/fsipapers07.htm
Friedman J (2009) ''A Crisis of Politics not Economics – Complexity, Ignorance, and Policy Failure'. October. Critical Review 21(2–3): 127–183. Oct 2009. DOI: 10.1080/08913810903030980
Geithner, T (2008) ‘Reducing Systemic Risk in a Dynamic Financial System’, Remarks at The Economic Club of New York, 12 June 2008, Federal Reserve Bank of New York. http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html
Goodhart, C (2000) ‘The Organisational Structure of Banking Supervision’, FSI Occasional Paper No. 1, November, Basel, Switzerland: Financial Stability Institute, BIS. http://www.bis.org/fsi/fsipapers01.pdf
Rustomjee, C (2009) 'Bank Regulation and the Resolution of Banking Crises, Unit 6'. London: School of Oriental and Management Studies-CeFiMS.
Sants, H (2009) 'Speech at Bloomberg'. UK FSA, Nov 09, 2009, http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/1109_hs.shtml
In the past, the FSA was primarily reactive, only making interventions on readily observable facts and adhering to the view that it should leave management to make its own decisions.
Intensive supervision, in contrast, focuses on the risks inherent in a firm’s business model and enables us to be proactive and not reactive to the management of these risks.
Our outcomes-focused philosophy requires supervisors to judge firms on the likely consequences of their decisions.
This means the proportion of our time spent looking at systems and controls will diminish relative to our focus on assessing the outcomes of a firm’s actions. This will necessarily be controversial at times, as our view and the firm’s view will not always coincide.
This divergence of judgement can normally be resolved, but the FSA recognises that this new approach may create tensions and will certainly no longer be seen as light touch!
To enable us to deliver on this approach we have equipped ourselves both to forecast and test outcomes. This capacity is needed to enable us to effectively make judgements on the judgements firms are making.
The forecasting element requires in-house modelling capability, such as that we now have for capital and liquidity. This does of course require more data to be collected from firms. And it will involve us looking more closely at the risks, both prudential and conduct, inherent in the product; from development to expiry.
The testing element requires supervisory resource to be devoted to an inspection-based approach to individual transactions.
Sinclair, Peter JN (2000) ‘Central Banks and Financial Stability’, Bank of England Quarterly Bulletin, November: 377–89. http://www.bankofengland.co.uk/publications/quarterlybulletin/qb000403.pdf
Stiglitz J, Orszag J & Orszag P (2002) 'Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard'. Fannie Mae Papers, Volume I, Issue 2, March. Ask for a PDF.
US Treasury Department (2008) ‘The Department of the Treasury Blueprint for a Modernised Regulatory Financial Structure’ (April), Washington, DC: US Treasury Department.
The Walker Review (2009) 'A review of corporate governance in UK banks and other financial industry entities: Final recommendations'. November 26, 2009. http://www.hm-treasury.gov.uk/d/walker_review_261109.pdf (PDF 823KB)
All documents of this review: http://www.hm-treasury.gov.uk/walker_review_information.htm
WB (The International Bank for Reconstruction and Development/The World Bank/The International Monetary Fund) (2005) 'Financial Sector Assessment: A Handbook', Appendix F: ’Institutional Structure of Financial Regulation and Supervision’. Washington, DC: IBRD/WB/IMF.
Glossary
BCBS: Basel Committee on Banking Supervision
BIS: Bank of International Settlements
BoE: Bank of England
ECB: European Central Bank
CRA: credit rating agency
FHA: Federal Housing Administration
FI: financial institution
FSA: Financial Services Authority
IBRD: International Bank for Reconstruction and Development
IMF: International Monetary Fund
GBS: Global Business Services
GSE: government-sponsored enterprise, government-sponsored entity
MBS: Mortgage-backed security
OFC: offshore financial center
S&L Associations: Savings and Loans Associations
SVI: structured investment vehicle
WB: World Bank
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