water crises

Last year, news broke that Nestlé, the largest bottled water producer in the world, had been extracting water from the drought-stricken San Bernardino National Forest on a permit that was supposed to expire in 1988 — and hadn’t been re-evaluated … Continue reading

Last year, news broke that Nestlé, the largest bottled water producer in the world, had been extracting water from the drought-stricken San Bernardino National Forest on a permit that was supposed to expire in 1988 — and hadn’t been re-evaluated by the U.S. Forest Service in nearly 40 years!

Now, the Forest Service is proposing to renew Nestlé’s permit for another five years, even as drought conditions persists in the western U.S.1

That’s unacceptable. But our pressure can make a difference. The latest Forest Service plan comes after intense public pressure on the agency, including petitions from more than 190,000 CREDO activists. In a major step forward, the proposal triggers a re-evaluation of the impact of Nestlé’s water withdrawals under the National Environmental Policy Act (NEPA). We have to make sure the review is as comprehensive as possible, which will show that Nestlé’s water extraction must be put to a stop.

Tell the U.S. Forest Service: Conduct a comprehensive review and put a stop to Nestlé’s water extraction in the San Bernardino National Forest. Submit a comment now.

Nestlé has been taking a self-reported 25 million gallons a year from the forest’s Strawberry Creek — which is only at 10 percent of its 90—year average level.2 As the water level drops over the summer, Nestlé’s continued withdrawals pose a risk to the creek ecosystem by making water levels even lower.

Incredibly, Nestlé pays only $524 (yes, five hundred and twenty four dollars!) each year to draw out the tens of millions of gallons it sells to the public under the Arrowhead Mountain label.

But this isn’t just about Nestlé or the San Bernardino National Forest — it’s a symbol of a much deeper problem in federal lands management that continues to prioritize corporate profits over protecting and preserving public resources.

Sally Jewell, secretary of the Department of the Interior, recently laid out a vision for re-evaluating our federal lands management to prioritize protection and preservation.3 But the U.S. Forest Service, which is under the Department of Agriculture, controls a full 25 percent of federal lands.

Pushing for the Forest Service to stop rubber-stamping Nestlé’s corporate water profiteering sends an important signal in the fight to preserve our public lands and resources.

Submit a comment now urging the Forest Service to stop Nestlé’s water extraction.

Thank you speaking out.

Elijah Zarlin, Director of Climate Campaigns
CREDO Action from Working Assets

Add your name:

Take action now ?
  1. Agency proposes 5-year Nestle bottled water permit,” Desert Sun News, 3/18/16.
  2. After years, review of Nestle water permit to begin,” Desert Sun News, 8/24/15.
  3. Interior Secretary Sally Jewell is calling for ‘a major course correction’ in the way the nation conserves its public lands,” Associated Press, 4/19/16.

The questions is: What happens when a military superpower and 1,5 billion desperate people start running out of water?


Future Impact of Climate Change Visible Now in Yemen

November 24, 2014

Water conflict is a term describing a conflict between countries, states, or groups over an access to water resources.[1][2][3] The United Nations recognizes that water disputes result from opposing interests of water users, public or private.[4]

A wide range of water conflicts appear throughout history, though rarely are traditional wars waged over water alone.[5] Instead, water has historically been a source of tension and a factor in conflicts that start for other reasons. However, water conflicts arise for several reasons, including territorial disputes, a fight for resources, and strategic advantage.[6] A comprehensive online database of water-related conflicts—the Water Conflict Chronology—has been developed by the Pacific Institute.[7] This database lists violence over water going back nearly 5,000 years.

These conflicts occur over both freshwater and saltwater, and both between and within nations. However, conflicts occur mostly over freshwater; because freshwater resources are necessary, yet limited, they are the center of water disputes arising out of need for potable water and irrigation.[8] As freshwater is a vital, yet unevenly distributed natural resource, its availability often impacts the living and economic conditions of a country or region. The lack of cost-effective water supply options in areas like the Middle East,[9] among other elements of water crises can put severe pressures on all water users, whether corporate, government, or individual, leading to tension, and possibly aggression.[10] Recent humanitarian catastrophes, such as the Rwandan Genocide or the war in Sudanese Darfur, have been linked back to water conflicts.[1]

A recent report “Water Cooperation for a Secure World” published by Strategic Foresight Group concludes that active water cooperation between countries reduces the risk of war. This conclusion is reached after examining trans-boundary water relations in over 200 shared river basins in 148 countries,[11] though as noted below, a growing number of water conflicts are sub-national.


No Wars for Water

Why Climate Change Has Not Led to Conflict


From California to the Middle East, huge areas of the world are drying up and a billion people have no access to safe drinking water. US intelligence is warning of the dangers of shrinking resources and experts say the world is ‘standing on a precipice’

Perhaps this chapter from THE WORLD’S WATER Volume 8 The Biennial Report on Freshwater Resources will be of interest (you should have heard of this book – The World’s Water is the most comprehensive and up-to-to date source of information and analysis on freshwater resources.)

The Syrian Conflict and the Role of Water

‘Starting in 2006, however, and lasting into 2011, Syria experienced a multi-season extreme drought and agricultural failures, described by Shahrzad Mohtadi as the “worst long-term drought and most severe set of crop failures since agricultural civilizations began in the Fertile Crescent many millennia ago” (Mohtadi 2012).

Robert Worth of the New York Times noted that this drought contributed to a series of social and economic dislocations (Worth 2010). The United Nations estimated that by 2011, the drought was affecting 2–3 million people, with 1 million driven into food insecurity. More than 1.5 million people—mostly agricultural workers and family farmers—moved from rural regions to cities and temporary settlements near urban centers, especially on the outskirts of Aleppo, Hama, Homs, Damascus, and Dara’a.

A research paper published in 2012 suggested that climate change is already beginning to influence long-term droughts in the region including Syria by reducing winter rainfall (Hoerling et al. 2012). That study suggests that winter droughts are increasingly common and that human-caused climate change is playing a role. Martin Hoerling of the National Oceanic and Atmospheric Administration’s Earth System Research Laboratory, one of the study’s authors, stated, “The magnitude and frequency of the drying that has occurred is too great to be explained by natural variability alone” (NOAA 2011).

If the international community wants to reduce the risks of local and international political conflicts and violence over water, more effort will have to be put into recognizing these risks and improving the tools needed to reduce them. ‘

—-

other reports have also shown the link between climate change and the war in Syria. For example,

http://news.nationalgeographic.com/news/2015/03/150302-syria-war-climate-change-drought/

http://www.scientificamerican.com/article/climate-change-hastened-the-syrian-war/

http://www.pnas.org/content/112/11/3241.abstract

the last of these states ‘We conclude that human influences on the climate system are implicated in the current Syrian conflict.’

A leading panel of retired generals and admirals, the CNA Corporation Military Advisory Board, recently labeled the impacts of climate change “catalysts for conflict” in vulnerable regions. The Pentagon concluded similarly in last year’s Quadrennial Defense Review that the effects of climate change are “threat multipliers,” enabling terrorism and other violence by aggravating underlying societal problems.

The CNA report states:

‘The nature and pace of observed climate changes—and an emerging scientific consensus on their projected consequences—pose severe risks for our national security. During our decades of experience in the U.S. military, we have addressed many national security challenges, from containment and deterrence of the Soviet nuclear threat during the Cold War to political extremism and transnational terrorism in recent years. The national security risks of projected climate change are as serious as any challenges we have faced. ‘

—-

The Pentagon report states:

‘Climate change poses another significant challenge for the United States and the world at large. As greenhouse gas emissions increase, sea levels are rising, average global temperatures are increasing, and severe weather patterns are accelerating. These changes, coupled with other global dynamics, including growing, urbanizing, more affluent populations, and substantial economic growth in India, China, Brazil, and other nations, will devastate homes, land, and infrastructure. Climate change may exacerbate water scarcity and lead to sharp increases in food costs. The pressures caused by climate change will influence resource competition while placing additional burdens on economies, societies, and governance institutions around the world. These effects are threat multipliers that will aggravate stressors abroad such as poverty, environmental degradation, political instability, and social tensions – conditions that can enable terrorist activity and other forms of violence.’

and on the Turkana in northern Kenya:

Tropic of Chaos: Climate Change and the New Geography of Violence (chapters 4-6 look at Kenya)

http://www.amazon.com/Tropic-Chaos-Climate-Geography-Violence/dp/1568587295

Climate Change and the Turkana and Merille Conflict

http://www1.american.edu/ted/ice/turkana-merille.htm

Climate Change and Violent Conflict in Kenya: A Two-way Relationship.

http://www.researchgate.net/publication/262984122_Climate_Change_and_Violent_Conflict_in_Kenya_A_Two….

The video here might also help http://e360.yale.edu/feature/when_the_water_ends_africas_climate_conflicts/2331/

Óscar Andrés Rodríguez Maradiaga

Óscar Andrés Rodríguez Maradiaga SDB (born December 29, 1942) is a Honduran Cardinal of the Catholic Church. He is the current Archbishop of Tegucigalpa, President of Caritas Internationalis and was President of the Latin American Episcopal Conference (CELAM) from 1995 … Continue reading

Óscar Andrés Rodríguez Maradiaga SDB (born December 29, 1942) is a Honduran Cardinal of the Catholic Church. He is the current Archbishop of Tegucigalpa, President of Caritas Internationalis and was President of the Latin American Episcopal Conference (CELAM) from 1995 to 1999. Rodríguez was elevated to the cardinalate in 2001. He was the Vatican‘s spokesman with the International Monetary Fund and the World Bank, on the issue of Third World debt.

Óscar Andrés Rodríguez Maradiaga

Óscar Andrés Rodríguez Maradiaga SDB (born December 29, 1942) is a Honduran Cardinal of the Catholic Church. He is the current Archbishop of Tegucigalpa, President of Caritas Internationalis and was President of the Latin American Episcopal Conference (CELAM) from 1995 … Continue reading

Óscar Andrés Rodríguez Maradiaga SDB (born December 29, 1942) is a Honduran Cardinal of the Catholic Church. He is the current Archbishop of Tegucigalpa, President of Caritas Internationalis and was President of the Latin American Episcopal Conference (CELAM) from 1995 to 1999. Rodríguez was elevated to the cardinalate in 2001. He was the Vatican‘s spokesman with the International Monetary Fund and the World Bank, on the issue of Third World debt.

Compartamos Banco

  Compartamos Banco From Wikipedia, the free encyclopedia Compartamos, S.A.B de C.V. Type Sociedad Anónima Bursátil de Capital Variable Traded as BMV: GENTERA Industry Banking Founded 1990 Headquarters Mexico City, Mexico Key people Carlos Labarthe Costas,(Chairman) Fernando Álvarez Toca, (CEO) Products Financial … Continue reading

 

Compartamos Banco

From Wikipedia, the free encyclopedia
Compartamos, S.A.B de C.V.
Sociedad Anónima Bursátil de Capital Variable
Traded as BMVGENTERA
Industry Banking
Founded 1990
Headquarters Mexico City, Mexico
Key people
Carlos Labarthe Costas,(Chairman)
Fernando Álvarez Toca, (CEO)
Products Financial services
Revenue Increase US$ 33.5 million (2012)
Increase US$ 154.2 million (2012)
Total assets Increase US$ 1.7 billion (2012)
Number of employees
15,000
Website www.compartamos.com

Compartamos Banco is a Mexican bank and the largest microfinance bank in Latin America, serving more than 2.5 million clients. The bank was founded in 1990 and is headquartered in Mexico City.

The bank is engaged in the credit and insurance sectors. In the Credit division, Compartamos offers a range of loans, including Woman Credit, Additional Credit, Home Improvement Credit, Solidarity Credit and Individual Credit, and in the Insurance division it provides Life Insurance and Integral Insurance. The company has 352 service offices in the Mexican domestic market.

Founded by Jose Ignacio Avalos Hernandez as an NGO in 1990, Compartamos aimed to alleviate poverty by providing microcreditto small businesses, initially by offering loans to women at the base of the economic pyramid.[1]

In order to grow the fund, it was decided to incorporate as a for-profit company in 2000, and a commercial banking license was obtained in 2006 [2]

In 2007 Compartamos controversially raised $467 million from the issue of an IPO,[2] earning large returns for private investors as well as philanthropic backers such as ACCION International and the World Bank without raising any additional capital.[3] In 2011, the group expanded operations to Guatemala and acquired Financiero Crear in Peru.[1]

Compartamos attracted fierce criticisms in the wake of the IPO for enriching wealthy private investors with returns on equity of 53% generated from charging interest rates in excess of 100% from those in poverty.[2][4]

Microfinance pioneer Muhammad Yunus described Compartamos’s priorities as “screwed up” and suggested they should not be compared with the microcredit projects he had championed.[4]

The Consultative Group to Assist the Poor, a World Bank affiliate that provided some of the early funding for Compartamos, argued that the IPO was the consequence of a justifiable earlier decision to take private investment to expand their capacity to offer loans, but expressed concern Compartamos may be placing shareholders’ interests ahead of their clients.[3]

Gentera

https://www.gentera.com.mx/wps/portal/gentera/inicio

https://www.gentera.com.mx/wps/themes/html/Gentera/media/informeanual/GENTERA2014/documentos/annual-report-2014.pdf

https://www.gentera.com.mx/wps/themes/html/Gentera/media/informeanual/GENTERA2014/en/quienes-somos.html

http://www.forbes.com.mx/grupo-compartamos-se-transforma-en-gentera/

https://www.compartamos.com/wps/portal/Compartamos/Inicio

https://en.wikipedia.org/wiki/Compartamos_Banco

Compartamos Banco

  Compartamos Banco From Wikipedia, the free encyclopedia Compartamos, S.A.B de C.V. Type Sociedad Anónima Bursátil de Capital Variable Traded as BMV: GENTERA Industry Banking Founded 1990 Headquarters Mexico City, Mexico Key people Carlos Labarthe Costas,(Chairman) Fernando Álvarez Toca, (CEO) Products Financial … Continue reading

 

Compartamos Banco

From Wikipedia, the free encyclopedia
Compartamos, S.A.B de C.V.
Sociedad Anónima Bursátil de Capital Variable
Traded as BMVGENTERA
Industry Banking
Founded 1990
Headquarters Mexico City, Mexico
Key people
Carlos Labarthe Costas,(Chairman)
Fernando Álvarez Toca, (CEO)
Products Financial services
Revenue Increase US$ 33.5 million (2012)
Increase US$ 154.2 million (2012)
Total assets Increase US$ 1.7 billion (2012)
Number of employees
15,000
Website www.compartamos.com

Compartamos Banco is a Mexican bank and the largest microfinance bank in Latin America, serving more than 2.5 million clients. The bank was founded in 1990 and is headquartered in Mexico City.

The bank is engaged in the credit and insurance sectors. In the Credit division, Compartamos offers a range of loans, including Woman Credit, Additional Credit, Home Improvement Credit, Solidarity Credit and Individual Credit, and in the Insurance division it provides Life Insurance and Integral Insurance. The company has 352 service offices in the Mexican domestic market.

Founded by Jose Ignacio Avalos Hernandez as an NGO in 1990, Compartamos aimed to alleviate poverty by providing microcreditto small businesses, initially by offering loans to women at the base of the economic pyramid.[1]

In order to grow the fund, it was decided to incorporate as a for-profit company in 2000, and a commercial banking license was obtained in 2006 [2]

In 2007 Compartamos controversially raised $467 million from the issue of an IPO,[2] earning large returns for private investors as well as philanthropic backers such as ACCION International and the World Bank without raising any additional capital.[3] In 2011, the group expanded operations to Guatemala and acquired Financiero Crear in Peru.[1]

Compartamos attracted fierce criticisms in the wake of the IPO for enriching wealthy private investors with returns on equity of 53% generated from charging interest rates in excess of 100% from those in poverty.[2][4]

Microfinance pioneer Muhammad Yunus described Compartamos’s priorities as “screwed up” and suggested they should not be compared with the microcredit projects he had championed.[4]

The Consultative Group to Assist the Poor, a World Bank affiliate that provided some of the early funding for Compartamos, argued that the IPO was the consequence of a justifiable earlier decision to take private investment to expand their capacity to offer loans, but expressed concern Compartamos may be placing shareholders’ interests ahead of their clients.[3]

Gentera

https://www.gentera.com.mx/wps/portal/gentera/inicio

https://www.gentera.com.mx/wps/themes/html/Gentera/media/informeanual/GENTERA2014/documentos/annual-report-2014.pdf

https://www.gentera.com.mx/wps/themes/html/Gentera/media/informeanual/GENTERA2014/en/quienes-somos.html

http://www.forbes.com.mx/grupo-compartamos-se-transforma-en-gentera/

https://www.compartamos.com/wps/portal/Compartamos/Inicio

https://en.wikipedia.org/wiki/Compartamos_Banco

the World Bank on Climate Change

Climate change is a fundamental threat to development and the fight against poverty.  The World Bank Group is concerned that without bold action now, the warming planet threatens to put prosperity out of reach of millions and roll back decades … Continue reading

Climate change is a fundamental threat to development and the fight against poverty.  The World Bank Group is concerned that without bold action now, the warming planet threatens to put prosperity out of reach of millions and roll back decades of development.

The science is unequivocal that humans are the cause of global warming, and major changes are already being observed. Since the turn of the century (2000–2013), each year has ranked among the 15 warmest since record keeping began 134 years ago. The intensity of extreme weather-related events has also increased.  Recent experience is a stark reminder that no country — rich or poor — is immune from the impacts of climate-related disasters today.

Turn Down the Heat, a snapshot of the latest climate science prepared for the Word Bank by the Potsdam Institute for Climate Impact Research, says we are on a path to a 4°C (7.2°F) warmer world by the end of this century. The report provides a clear picture of the devastating impacts on agriculture, water resources, ecosystems, and human health. While every region will be affected, those least able to adapt — the poor and most vulnerable — would be hit hardest. A follow-up report, which focused on impacts of climate change on Sub-Saharan Africa, South Asia, and South East Asia, tells us that if the world warms by 2°C (3.6°F) — warming which may be reached in 20 to 30 years — there will be widespread food shortages, unprecedented heat-waves, and more intense storms.

The World Bank Group believes a 4°C warmer world can and must be avoided. Immediate global action is needed to slow the growth in greenhouse gas emissions this decade and help countries prepare for a 2°C warmer world and adapt to changes that are already locked in.

At the Bank, we are stepping up our mitigation, adaptation, and disaster risk management work, and will increasingly look at all our business through a climate lens.

Last Updated: May 14, 2014

The Power Elite

One thing one have to acknowledge is that what we have is systemic corruption, rather than individual incidental corruption. Sure Obama is a corrupt egocentric cynic. But he is no closet communist, or a foreigner, or a worshiper of the malignant. He does no evil for evil sake. What he does is the bidding of power groups because that´s how he got to be President, and because it is the path of least resistance. Obama is no different in essence form, say, Bush. The Power elite gets its way because they are organized, concentrate Power and Money, and control the Media. The common man can resist by being informed, understand the issues, and look at policies on their own merits. Most of the public agenda is a charade of false topics to entertain the public and brand the two wings of the Business Party. It is hard to do but one must start from objective understanding: Who´s behind? Why? What are the implications?

Published on Jul 17, 2012

Nobel Prize winning economis, author and lecturer, Joseph Stiglitz, talks about his latest book, THE PRICE OF INEQUALITY: HOW TODAY’S DIVIDED SOCIETY ENDANGERS OUR FUTURE. Joseph Stiglitz spoke at the Cedar Hills Crossing Powell’s Bookstore in Beaverton, Oregon, on June 14th, 2012. To find out more about the author, please visit his website at josephstiglitz.com. This program was produced by pdxjustice Media Productions of Portland, Oregon. To find out more about the work of pdxjustice, please visit our website at pdxjustice.org.

How so?

Are these people mad? Economic growth and job creation at all costs? Is he aware how much of current “production” is outright JUNK&WEAPONS meant only to justify “economic” process? We should discourage automation so that people could keep slaving meaninglessly?


Uploaded on Dec 5, 2011

The gap between rich and poor in OECD countries has reached its highest level for over 30 years, and governments must act quickly to tackle inequality, according to a new OECD report, “Divided We Stand”.

For more information, visit: www.oecd.org/els/social/inequality


Published on Apr 3, 2013
The richest 300 people in the world are more wealthy than the poorest 3 billion combined, and every year rich countries take over 10 times more money from poor countries than they give in aid. Find out more by watching the video or visiting our website http://www.therules.org

-Production Company: Grain Media (grainmedia.co.uk)
-Motion Graphics Artist: Nick Pittom (nickpittom.com)
-Music: Sup Doodle and Apple Juice Kid (AppleJuiceKid.com)
-References: http://www.therules.org/inequality-vi…
-Accompanying article in Al Jazeera: http://www.aljazeera.com/indepth/opin…


Published on Nov 20, 2012
Infographics on the distribution of wealth in America, highlighting both the inequality and the difference between our perception of inequality and the actual numbers. The reality is often not what we think it is.

References:
http://www.motherjones.com/politics/2…
http://danariely.com/2010/09/30/wealt…
http://thinkprogress.org/economy/2011…
http://money.cnn.com/2012/04/19/news/…


C. Wright Mills 1956

The Power Elite


Source: The Power Elite, C. Wright Mills, Oxford University Press, 1956;
Transcribed: by Andy Blunden.

12. The Power Elite

EXCEPT for the unsuccessful Civil War, changes in the power system of the United States have not involved important challenges to its basic legitimations. Even when they have been decisive enough to be called ‘revolutions,’ they have not involved the ‘resort to the guns of a cruiser, the dispersal of an elected assembly by bayonets, or the mechanisms of a police state.’ [1] Nor have they involved, in any decisive way, any ideological struggle to control masses. Changes in the American structure of power have generally come about by institutional shifts in the relative positions of the political, the economic, and the military orders. From this point of view, and broadly speaking, the American power elite has gone through four epochs, and is now well into a fifth.

1

I. During the first — roughly from the Revolution through the administration of John Adams — the social and economic, the political and the military institutions were more or less unified in a simple and direct way: the individual men of these several elites moved easily from one role to another at the top of each of the major institutional orders. Many of them were many-sided men who could take the part of legislator and merchant, frontiersman and soldier, scholar and surveyor.[2]

Until the downfall of the Congressional caucus of 1824, political institutions seemed quite central; political decisions, of great importance; many politicians, considered national statesmen of note. ‘Society, as I first remember it,’ Henry Cabot Lodge once said, speaking of the Boston of his early boyhood, ‘was based on the old families; Doctor Holmes defines them in the “Autocrat” as the families which had held high position in the colony, the province and during the Revolution and the early decades of the United States. They represented several generations of education and standing in the community … They had ancestors who had filled the pulpits, sat upon the bench, and taken part in the government under the crown; who had fought in the Revolution, helped to make the State and National constitutions and served in the army or navy; who had been member’s of the House or Senate in the early days of the Republic, and who had won success as merchants, manufacturers, lawyers, or men of letters.’[3]
Such men of affairs, who — as I have noted — were the backbone of Mrs. John Jay’s social list of 1787, definitely included political figures of note. The important fact about these early days is that social life, economic institutions, military establishment, and political order coincided, and men who were high politicians also played key roles in the economy and, with their families, were among those of the reputable who made up local society. In fact, this first period is marked by the leadership of men whose status does not rest exclusively upon their political position, although their political activities are important and the prestige of politicians high. And this prestige seems attached to the men who occupy Congressional position as well as the cabinet. The elite are political men of education and of administrative experience, and, as Lord Bryce noted, possess a certain largeness of view and dignity of character.’[4]

II. During the early nineteenth century — which followed Jefferson’s political philosophy, but, in due course, Hamilton’s economic principles — the economic and political and military orders fitted loosely into the great scatter of the American social structure. The broadening of the economic order which came to be seated in the individual property owner was dramatized by Jefferson’s purchase of the Louisiana Territory and by the formation of the Democratic-Republican party as successor to the Federalists.

In this society, the ‘elite’ became a plurality of top groups, each in turn quite loosely made up. They overlapped to be sure, but again quite loosely so. One definite key to the period, and certainly to our images of it, is the fact that the Jacksonian Revolution was much more of a status revolution than either an economic or a political one. The metropolitan 400 could not truly flourish in the face of the status tides of Jacksonian democracy; alongside it was a political elite in charge of the new party system. No set of men controlled centralized means of power; no small clique dominated economic, much less political, affairs. The economic order was ascendant over both social status and political power; within the ,economic order, a quite sizable proportion of all the economic men were among those who decided. For this was the period — roughly from Jefferson to Lincoln — when the elite was at most a loose coalition. The period ended, of course, with the decisive split of southern and northern types.
Official commentators like to contrast the ascendancy in totalitarian countries of a tightly organized clique with the American .system of power. Such comments, however, are easier to sustain if one compares mid-twentieth-century Russia with mid-nineteenth-century America, which is what is often done by Tocqueville-quoting Americans making the contrast. But that was an America of a century ago, and in the century that has passed, the American elite have not remained as patrioteer essayists have described them to us. The ‘loose cliques’ now head institutions of a scale and power not then existing and, especially since World War I, the loose cliques have tightened up. We are well beyond the era of romantic pluralism.

III. The supremacy of corporate economic power began, in a formal way, with the Congressional elections of 1866, and was consolidated by the Supreme Court decision of 1886 which declared that the Fourteenth Amendment protected the corporation. That period witnessed the transfer of the center of initiative from government to corporation. Until the First World War (which gave us an advanced showing of certain features of our own period) this was an age of raids on the government by the economic elite, an age of simple corruption, when Senators and judges were simply bought up. Here, once upon a time, in the era of McKinley and Morgan, far removed from the undocumented complexities of our own time, many now believe, was the golden era of the American ruling class.[5]

The military order of this period, as in the second, was subordinate to the political, which in turn was subordinate to the economic. The military was thus off to the side of the main driving forces of United States history. Political institutions in the United States have never formed a centralized and autonomous domain of power; they have been enlarged and centralized only reluctantly in slow response to the public consequence of the corporate economy.
In the post-Civil-War era, that economy was the dynamic; the ‘trusts’ — as policies and events make amply clear — could readily use the relatively weak governmental apparatus for their own ends. That both state and federal governments were decisively limited in their power to regulate, in fact meant that they were themselves regulatable by the larger moneyed interests. Their powers were scattered and unorganized; the powers of the industrial and financial corporations concentrated and interlocked. The Morgan interests alone held 341 directorships in 112 corporations with an aggregate capitalization of over $22 billion — over three times the assessed value of all real and personal property in New England.[6] With revenues greater and employees more numerous than those of many states, corporations controlled parties, bought laws, and kept Congressmen of the ‘neutral’ state. And as private economic power overshadowed public political power, so the economic elite overshadowed the political.
Yet even between 1896 and 1919, events of importance tended to assume a political form, foreshadowing the shape of power which after the partial boom of the ‘twenties was to prevail in the New Deal. Perhaps there has never been any period in American history so politically transparent as the Progressive era of President-makers and Muckrakers.

IV. The New Deal did not reverse the political and economic relations of the third era, but it did create within the political arena, as well as in the corporate world itself, competing centers of power that challenged those of the corporate directors. As the New Deal directorate gained political power, the economic elite, which in the third period had fought against the growth of ‘government’ while raiding it for crafty privileges, belatedly attempted to join it on the higher levels. When they did so they found themselves confronting other interests and men, for the places of decision were crowded. In due course, they did come to control and to use for their own purposes the New Deal institutions whose creation they had so bitterly denounced.

But during the ‘thirties’ the political order was still an instrument of small propertied farmers and businessmen, although they were weakened, having lost their last chance for real ascendancy in the Progressive era. The struggle between big and small property flared up again, however, in the political realm of the New Deal era, and to this struggle there was added, as we have seen, the new struggle of organized labor and the unorganized unemployed, This new force flourished under political tutelage, but nevertheless, for the first time in United States history, social legislation and lower-class issues became important features of the reform movement.
In the decade of the ‘thirties, a set of shifting balances involving newly instituted farm measures and newly organized labor unions — along with big business — made up the political and administrative drama of power. These farm, labor, and business groups, moreover, were more or less contained within the framework of an enlarging governmental structure, whose political directorship made decisions in a definitely political manner. These groups pressured, and in pressuring against one another and against the governmental and party system, they helped to shape it. But it, could not be said that any of them for any considerable length of time used that government unilaterally as their instrument. That is why the ‘thirties was a political decade: the power of business was not replaced, but it was contested and supplemented: it became one major power within a structure of power that was chiefly run by political men, and not by economic or military men turned political.
The earlier and middle Roosevelt administrations can best be understood as a desperate search for ways and means, within the existing capitalist system, of reducing the staggering and ominous xis army of the unemployed. In these years, the New Deal as a system of power was essentially a balance of pressure groups and interest blocs. The political top adjusted many conflicts, gave way to this demand, sidetracked that one, was the unilateral servant of none, and so evened it all out into such going policy line as prevailed from one minor crisis to another. Policies were the result of a political act of balance at the top. Of course, the balancing act that Roosevelt performed did not affect the fundamental institutions of capitalism as a type of economy. By his policies, he subsidized the defaults of the capitalist economy, which had simply broken down; and by his rhetoric, he balanced its political disgrace, putting ‘economic royalists’ in the political doghouse.
The ‘welfare state,’ created to sustain the balance and to carry out the subsidy, differed from the ‘laissez-faire’ state: ‘If the state was believed neutral in the days of T.R. because its leaders claimed to sanction favors for no one,’ Richard Hofstadter has remarked, ‘the state under F.D.R. could be called neutral only in the sense that it offered favors to everyone.’ [7] The new state of the corporate commissars differs from the old welfare state. In fact, the later Roosevelt years — beginning with the entrance of the United States into overt acts of war and preparations for World War II cannot be understood entirely in terms of an adroit equipoise of political power.

2

We study history, it has been said, to rid ourselves of it, and the history of the power elite is a clear case for which this maxim is correct. Like the tempo of American life in general, the long term trends of the power structure have been greatly speeded up since World War II, and certain newer trends within and between the dominant institutions have also set the shape of the power elite and given historically specific meaning to its fifth epoch:
I. In so far as the structural clue to the power elite today lies in the political order, that clue is the decline of politics as genuine and public debate of alternative decisions — with nationally responsible and policy-coherent parties and with autonomous organizations connecting the lower and middle levels of power with the top levels of decision. America is now in considerable part more a formal political democracy than a democratic social structure, and even the formal political mechanics are weak.

The long-time tendency of business and government to become more intricately and deeply involved with each either has, in the fifth epoch, reached a new point of explicitness. The two cannot now be seen clearly as two distinct worlds. It is in terms of the executive agencies of the state that the rapprochement has proceeded most decisively. The growth of the executive branch of the government, with its agencies that patrol the complex economy, does not mean merely the ‘enlargement of government’ as some sort of autonomous bureaucracy: it has meant the ascendancy of the corporation’s man as a political eminence.
During the New Deal the corporate chieftains joined the political directorate; as of World War II they have come to dominate it. Long interlocked with government, now they have moved into quite full direction of the economy of the war effort and of the postwar era. This shift of the corporation executives into the political directorate has accelerated the long-term relegation of the professional politicians in the Congress to the middle levels of power.

II. In so far as the structural clue to the power elite today lies in the enlarged and military state, that clue becomes evident in the military ascendancy. The warlords have gained decisive Political relevance, and the military structure of America is now in considerable part a political structure. The seemingly permanent military threat places a premium on the military and upon their control of men, materiel, money, and power; virtually all political and economic actions are now judged in terms of military definitions of reality: the higher warlords have ascended to a firm position within the power elite of the fifth epoch.

In part at least this has resulted from one simple historical fact, pivotal for the years since 1939: the focus of elite attention has been shifted from domestic problems, centered in the ‘thirties around slump, to international problems, centered in the ‘forties and ‘fifties around war. Since the governing apparatus of the United States has by long historic usage been adapted to and shaped by domestic clash and balance, it has not, from any angle, had suitable agencies and traditions for the handling of international problems. Such formal democratic mechanics as had arisen in the century and a half of national development prior to 1941, had not been extended to the American handling of international affairs. It is, in considerable part, in this vacuum that the power elite has grown.
III. In so far as the structural clue to the power elite today lies in the economic order, that clue is the fact that the economy is at once a permanent-war economy and a private-corporation economy. American capitalism is now in considerable part a military capitalism, and the most important relation of the big corporation to the state rests on the coincidence of interests between military and corporate needs, as defined by warlords and corporate rich. Within the elite as a whole, this coincidence of interest between the high military and the corporate chieftains strengthens both of them and further subordinates the role of the merely political men. Not politicians, but corporate executives, sit with the military and plan the organization of war effort.
The shape and meaning of the power elite today can be understood only when these three sets of structural trends are seen at their point of coincidence: the military capitalism of private corporations exists in a weakened and formal democratic system containing a military order already quite political in outlook and demeanor. Accordingly, at the top of this structure, the power elite has been shaped by the coincidence of interest between those who control the major means of production and those who control the newly enlarged means of violence; from the decline of the professional politician and the rise to explicit political command of the corporate chieftains and the professional warlords; from the absence of any genuine civil service of skill and integrity, independent of vested interests.
The power elite is composed of political, economic, and military men, but this instituted elite is frequently in some tension: it comes together only on certain coinciding points and only on certain occasions of ‘crisis.’ In the long peace of the nineteenth century, the military were not in the high councils of state, not of the political directorate, and neither were the economic men — they made raids upon the state but they did not join its directorate. During the ‘thirties, the political man was ascendant. Now the military and the corporate men are in top positions.
Of the three types of circle that compose the power elite today, it is the military that has benefited the most in its enhanced power, although the corporate circles have also become more explicitly intrenched in the more public decision-making circles. It is the professional politician that has lost the most, so much that in examining the events and decisions, one is tempted to speak of a political vacuum in which the corporate rich and the high warlord, in their coinciding interests, rule.
It should not be said that the three ‘take turns’ in carrying the initiative, for the mechanics of the power elite are not often as deliberate as that would imply. At times, of course, it is — as when ‘political men’ thinking they can borrow the prestige of generals, find that they must pay for it, or, as when during big slumps, economic men feel the need of a politician at once safe and possessing vote appeal. Today all three are involved in virtually all widely ramifying decisions. Which of the three types seems to lead depends upon ‘the tasks of the period’ as they, the elite, define them. Just now, these tasks center upon ‘defense’ and international affairs. Accordingly, as we have seen, the military are ascendant in two senses: as personnel and as justifying ideology. That is why, just now, we can most easily specify the unity and the shape of the power elite in terms of the military ascendancy.
But we must always be historically specific and open to complexities. The simple Marxian view makes the big economic man the real holder of power; the simple liberal view makes the big Political man the chief of the power system; and there are some who would view the warlords as virtual dictators. Each of these is an oversimplified view. It is to avoid them that we use the term ,power elite, rather than, for example, ‘ruling class.’
[‘Ruling class’ is a badly loaded phrase. ‘Class’ is an economic term; ‘rule’ a political one. The phrase, ‘ruling class,’ thus contains the theory that an economic class rules politically. That short-cut theory may or may not at times be true, but we do not want to carry that one rather simple theory about in the terms that we use to define our problems; we wish to state the theories explicitly, using terms of more precise and unilateral meaning. Specifically, the phrase ‘ruling class,’ in its common political connotations, does not allow enough autonomy to the political order and its agents, and it says nothing about the military as such. It should be clear to the reader by now that we do not accept as adequate the simple view that high economic men unilaterally make all decisions of national consequence. We hold that such a simple view of ‘economic determinism’ must be elaborated by ‘political determinism’ and ‘military determinism’; that the higher agents of each of these three domains now often have a noticeable degree of autonomy; and that only in the often intricate ways of coalition do they make up and carry through the most important decisions. Those are the major reasons we prefer ‘power elite’ to ‘ruling class’ as a characterizing phrase for the higher circles when we consider them in terms of power.]
In so far as the power elite has come to wide public attention, it has done so in terms of the ‘military clique.’ The power elite does, in fact, take its current shape from the decisive entrance into it of the military. Their presence and their ideology are its major legitimations, whenever the power elite feels the need to provide any. But what is called the ‘Washington military clique’ is not composed merely of military men, and it does not prevail merely in Washington. Its members exist all over the country, and it is a coalition of generals in the roles of corporation executives, of politicians masquerading as admirals, of corporation executives acting like politicians, of civil servants who become majors, of vice-admirals who are also the assistants to a cabinet officer, who is himself, by the way, really a member of the managerial elite.
Neither the idea of a ‘ruling class’ nor of a simple monolithic rise of ‘bureaucratic politicians’ nor of a ‘military clique’ is adequate. The power elite today involves the often uneasy coincidence of economic, military, and political power.

3

Even if our understanding were limited to these structural trends, we should have grounds for believing the power elite a useful, indeed indispensable, concept for the interpretation of what is going on at the topside of modem American society. But we are not, of course, so limited: our conception of the power elite do not need to rest only upon the correspondence of the institutional hierarchies involved, or upon the many points at which their shifting interests coincide. The ‘power elite’ as we conceive it, also rests upon the similarity of its personnel, and their personal and official relations with one another, upon their social and psychological affinities. In order to grasp the personal and social basis of the power elite’s unity, we have first to remind ourselves of the facts of origin, career, and style of life of each of the types of circle whose members compose the power elite.
The power elite is not an aristocracy, which is to say that it is not a political ruling group based upon a nobility of hereditary origin. It has no compact basis in a small circle of great families whose members can and do consistently occupy the top positions in the several higher circles which overlap as the power elite. But such nobility is only one possible basis of common origin. That it does not exist for the American elite does not mean that members of this elite derive socially from the full range of strata composing American society. They derive in substantial proportions from the upper classes, both new and old, of local society and the metropolitan 400. The bulk of the very rich, the corporate executives, the political outsiders, the high military, derive from, at most, the upper third of the income and occupational pyramids. Their fathers were at least of the professional and business strata, and very frequently higher than that. They are native-born Americans of native parents, primarily from urban areas, and, with the exceptions of the politicians among them, overwhelmingly from the East. They are mainly Protestants, especially Episcopalian or Presbyterian. In general, the higher the position, the greater the proportion of men within it who have derived from and who maintain connections with the upper classes. The generally similar origins of the members of the power elite are underlined and carried further by the fact of their increasingly common educational routine. Overwhelmingly college graduates substantial proportions have attended Ivy League colleges, although the education of the higher military, of course, differs from that of other members of the power elite.
But what do these apparently simple facts about the social composition of the higher circles really mean? In particular, what do they mean for any attempt to understand the degree of unity, and the direction of policy and interest that may prevail among these several circles? Perhaps it is best to put this question in a deceptively simple way: in terms of origin and career, who or what do these men at the top represent?
Of course, if they are elected politicians, they are supposed to represent those who elected them; and, if they are appointed, they are supposed to represent, indirectly, those who elected their appointers. But this is recognized as something of an abstraction, as a rhetorical formula by which all men of power in almost all systems of government nowadays justify their power of decision. M times it may be true, both in the sense of their motives and in the sense of who benefits from their decisions. Yet it would not be wise in any power system merely to assume it.
The fact that members of the power elite come from near the top of the nation’s class and status levels does not mean that they are necessarily ‘representative’ of the top levels only. And if they were, as social types, representative of a cross-section of the population, that would not mean that a balanced democracy of interest and power would automatically be the going political fact.
We cannot infer the direction of policy merely from the social origins and careers of the policy-makers. The social and economic backgrounds of the men of power do not tell us all that we need to know in order to understand the distribution of social power. For: (1) Men from high places may be ideological representatives of the poor and humble. (2) Men of humble origin, brightly self-made, may energetically serve the most vested and inherited interests. Moreover (3), not all men who effectively represent the interests of a stratum need in any way belong to it or personally benefit by policies that further its interests. Among the politicians, in short, there are sympathetic agents of given groups, conscious and unconscious, paid and unpaid. Finally (4), among the top decision-makers we find men who have been chosen for their positions because of their ‘expert knowledge.’ These are some of the obvious reasons why the social origins and careers of the power elite do not enable us to infer the class interests and policy directions of a modem system of power.
Do the high social origin and careers of the fop men mean nothing, then, about the distribution of power? By no means. They simply remind us that we must be careful of any simple and direct inference from origin and career to political character and policy, not that we must ignore them in our attempt at political understanding. They simply mean that we must analyze the political psychology and the actual decisions of the political directorate as well as its social composition. And they mean, above all, that we should control, as we have done here, any inference we make from the origin and careers of the political actors by close understanding of the institutional landscape in which they act out their drama. Otherwise we should be guilty of a rather simple-minded biographical theory of society and history.
Just as we cannot rest the notion of the power elite solely upon the institutional mechanics that lead to its formation, so we cannot rest the notion solely upon the facts of the origin and career of its personnel. We need both, and we have both — as well as other bases, among them that of the status intermingling.
But it is not only the similarities of social origin, religious affiliation, nativity, and education that are important to the psychological and social affinities of the members of the power elite. Even if their recruitment and formal training were more heterogeneous than they are, these men would still be of quite homogeneous social type. For the most important set of facts about a circle of men is the criteria of admission, of praise, of honor, of promotion that prevails among them; if these are similar within a circle, then they will tend as personalities to become similar. he circles that compose the power elite do tend to have such codes and criteria in common. The co-optation of the social types to which these common values lead is often more important than any statistics of common origin and career that we might have at hand.
There is a kind of reciprocal attraction among the fraternity of the successful — not between each and every member of the circles of the high and mighty, but between enough of them to insure a certain unity. On the slight side, it is a sort of tacit, mutual admiration; in the strongest tie-ins, it proceeds by intermarriage. And there are all grades and types of connection between these extremes. Some overlaps certainly occur by means of cliques and clubs, churches and schools.
If social origin and formal education in common tend to make the members of the power elite more readily understood and trusted by one another, their continued association further cements what they feel they have in common. Members of the several higher circles know one another as personal friends and even as neighbors; they mingle with one another on the golf course, in the gentleman’s clubs, at resorts, on transcontinental airplanes, and on ocean liners. They meet at the estates of mutual friends, face each other in front of the TV camera, or serve on the same philanthropic committee; and many are sure to cross one another’s path in the columns of newspapers, if not in the exact cafes from which many of these columns originate. As we have seen, of ‘The New 400’ of café society, one chronicler has named forty-one members of the very rich, ninety-three political leaders, and seventy-nine chief executives of corporations.
‘I did not know, I could not have dreamed,’ Whittaker Chambers has written, ‘of the immense scope and power of Hiss’ political alliances and his social connections, which cut across all party lines and ran from the Supreme Court to the Religious Society of Friends, from governors of states and instructors in college faculties to the staff members of liberal magazines. In the decade since I had last seen him’ he had used his career, and, in particular, his identification with the cause of peace through his part in organizing the United Nations, to put down roots that made him one with the matted forest floor of American upper class, enlightened middle class, liberal and official life. His roots could not be disturbed without disturbing all the roots on all sides of him.’ [8]
The sphere of status has reflected the epochs of the power elite. In the third epoch, for example, who could compete with ‘big money’? And in the fourth, with big politicians, or even the bright young men of the New Deal? And in the fifth, who can compete with the generals and the admirals and the corporate officials now so sympathetically portrayed on the stage, in the novel, and on the screen? Can one imagine Executive Suite as a successful motion picture in 1935? Or The Caine Mutiny?
The multiplicity of high-prestige organizations to which the elite usually belong is revealed by even casual examination of the obituaries of the big businessman, the high-prestige lawyer, the top general and admiral, the key senator: usually, high-prestige church, business associations, plus high-prestige clubs, and often plus military rank. In the course of their lifetimes, the university president, the New York Stock Exchange chairman, the head of the bank, the old West Pointer — mingle in the status sphere, within which they easily renew old friendships and draw upon them in an effort to understand through the experience of trusted others those contexts of power and decision in which they have not personally moved.
In these diverse contexts, prestige accumulates in each of the higher circles, and the members of each borrow status from one another. Their self-images are fed by these accumulations and these borrowings, and accordingly, however segmental a given man’s role may seem, he comes to feel himself a ‘diffuse’ or ‘generalized’ man of the higher circles. a ‘broad-gauge’ man. Perhaps such inside experience is one feature of what is meant by ‘judgment.’
The key organizations, perhaps, are the major corporations themselves, for on the boards of directors we find a heavy overlapping among the members of these several elites. On the lighter side, again in the summer and winter resorts, we find that, in an intricate series of overlapping circles; in the course of time, each meets each or knows somebody who knows somebody who knows that one.
The higher members of the military, economic, and political orders are able readily to take over one another’s point of view, always in a sympathetic way, and often in a knowledgeable way as well. They define one another as among those who count, and who, accordingly, must be taken into account. Each of them as a member of the power elite comes to incorporate into his own integrity, his own honor, his own conscience, the viewpoint, the expectations, the values of the others. If there are n o common ideals and standards among them that are based upon an explicitly aristocratic culture, that does not mean that they do not feel responsibility to one another.
All the structural coincidence of their interests as well as the intricate, psychological facts of their origins and their education, their careers and their associations make possible the psychological affinities that prevail among them, affinities that make it possible for them to say of one another: He is, of course, one of us. And all this points to the basic, psychological meaning of class consciousness. Nowhere in America is there as great a ‘class consciousness’ as among the elite; nowhere is it organized as effectively as among the power elite. For by class consciousness, as a psychological fact, one means that the individual member of a ‘class’ accepts only those accepted by his circle as among those who are significant to his own image of self.
Within the higher circles of the power elite, factions do exist; there are conflicts of policy; individual ambitions do clash. There are still enough divisions of importance within the Republican party, and even between Republicans and Democrats, to make for different methods of operation. But more powerful than these divisions are the internal discipline and the community of interests that bind the power elite together, even across the boundaries of nations at war.[9]

4

Yet we must give due weight to the other side of the case which may not question the facts but only our interpretation of them. There is a set of objections that will inevitably be made to our whole conception of the power elite, but which has essentially to do with only the psychology of its members. It might well be put by liberals or by conservatives in some such way as this:

‘To talk of a power elite — isn’t this to characterize men by their origins and associations? Isn’t such characterization both unfair and untrue? Don’t men modify themselves, especially Americans such as these, as they rise in stature to meet the demands of their jobs? Don’t they arrive at a view and a line of policy that represents, so far as they in their human weaknesses can know, the interests of the nation as a whole? Aren’t they merely honorable men who are doing their duty?’
What are we to reply to these objections?

I. We are sure that they are honorable men. But what is honor? Honor can only mean living up to a code that one believes to be honorable. There is no one code upon which we are all agreed. That is why, if we are civilized men, we do not kill off all of those with whom we disagree. The question is not: are these honorable men? The question is: what are their codes of honor? The answer to that question is that they are the codes of their circles, of those to whose opinions they defer. How could it be otherwise? That is one meaning of the important truism that all men are human and that all men are social creatures. As for sincerity, it can only be disproved, never proved.
II. To the question of their adaptability — which means their capacity to transcend the codes of conduct which, in their life’s work and experience, they have acquired — we must answer: simply no, they cannot, at least not in the handful of years most of them have left. To expect that is to assume that they are — indeed strange and expedient: such flexibility would in fact involve a violation of what we may rightly call their character and their integrity. By the way, may it not be precisely because of the lack of such character and integrity that earlier types of American politicians have not represented as great a threat as do these men of character?

It would be an insult to the effective training of the military, and to their indoctrination as well, to suppose that military officials. shed their military character and outlook upon changing from, uniform to mufti. This background is more important perhaps in the military case than in that of the corporate executives, for the training of the career is deeper and more total.
‘Lack of imagination,’ Gerald W. Johnson has noted, ‘is not to be confused with lack of principle. On the contrary, an unimaginative man is often a man of the highest principles. The trouble is that his principles conform to Cornford’s famous definition: “A principle is a rule of inaction giving valid general reasons for not doing in a specific instance what to unprincipled instinct would seem to be right.”’ [10]
Would it not be ridiculous, for example, to believe seriously that, in psychological fact, Charles Erwin Wilson represented anyone or any interest other than those of the corporate world? This is not because he is dishonest; on the contrary, it is because he is probably a man of solid integrity — as sound as a dollar. He is what he is and he cannot very well be anything else. He is a member of the professional corporation elite, just as are his colleagues, in the government and out of it; he represents the wealth of the higher corporate world; he represents its power; and he believes sincerely in his oft-quoted remark that ‘what is good for the United States is good for the General Motors Corporation and vice versa.’
The revealing point about the pitiful hearings on the confirmation of such men for political posts is not the cynicism toward the law and toward the law-makers on the middle levels of power which they display, nor their reluctance to dispose of their personal stock.” The interesting point is how impossible it is for such men to divest themselves of their engagement with the corporate world in general and with their own corporations in particular. Not only their money, but their friends, their interests, their training — their lives in short — are deeply involved in this world. The disposal of stock is, of course, merely a purifying ritual. The point is not so much financial or personal interests in a given corporation, but identification with the corporate world. To ask a man suddenly to divest himself of these interests and sensibilities is almost like asking a man to become a woman.

III. To the question of their patriotism, of their desire to serve the nation as a whole, we must answer first that, like codes of honor feelings of patriotism and views of what is to the whole nation’s good, are not ultimate facts but matters upon which there exists a great variety of opinion. Furthermore, patriotic opinions too are rooted in and die sustained by what a man has become by virtue of how and with whom he has lived. This is no simple mechanical determination of individual character by social conditions; it is an intricate process, well established in the major tradition of modern social study. One can only wonder why more social scientists do not use it systematically in speculating about politics.
IV. The elite cannot be truly thought of as men who are merely doing their duty. They are the ones who determine their duty, as well as the duties of those beneath them. They are not merely following orders: they give the orders. They are not merely ‘bureaucrats’: they command bureaucracies. They may try to disguise these facts from others and from themselves by appeals to traditions of which they imagine themselves the instruments, but there are many traditions, and they must choose which ones they will serve. They face decisions for which there simply are no traditions.

Now, to what do these several answers add up? To the fact that we cannot reason about public events and historical trends merely from knowledge about the motives and character of the men or the small groups who sit in the seats of the high and mighty. This fact, in turn, does not mean that we should be intimidated by accusations that in taking up our problem in the way we have, we are impugning the honor, the integrity, or the ability of those who are in high office. For it is not, in the first instance, a question of individual character; and if, in further instances, we find that it is, we should not hesitate to say so plainly. In the meantime, we must judge men of power by the standards of power, by what they do as decision-makers, and not by who they are or what they may do in private life. Our interest is not in that., we are interested in their policies and in the consequences of their conduct of office. .We must remember that these men of the power elite now occupy the strategic places in the structure of American society; that they command the dominant institutions of a dominant nation; that, as a set of men, they are in a position to make decisions with terrible consequences for the underlying populations of the world.

5

Despite their social similarity and psychological affinities, the members of the power elite do not constitute a club having a permanent membership with fixed and formal boundaries. It is of the nature of the power elite that within it there is a good deal of shifting about, and that it thus does not consist of one small set of the same men in the same positions in the same hierarchies. Because men know each other personally does not mean that among them there is a unity of policy; and because they do not know each other personally does not mean that among them there is a disunity. The conception of the power elite does not rest, as I have repeatedly said, primarily upon personal friendship.

As the requirements of the top places in each of the major hierarchies become similar, the types of men occupying these roles at the top — by selection and by training in the jobs — become similar. This is no mere deduction from structure to personnel. That it is a fact is revealed by the heavy traffic that has been going on between the three structures, often in very intricate patterns. The chief executives, the warlords, and selected politicians came into contact with one another in an intimate, working way during World War 11; after that war ended, they continued their associations, out of common beliefs, social congeniality, and coinciding interests. Noticeable proportions of top men from the military, the economic, and the political worlds have during the last fifteen years occupied positions in one or both of the other worlds: between these higher circles there is an interchangeability of position, based formally upon the supposed transferability of ‘executive ability,’ based in substance upon the co-optation by cliques of insiders. As members of a power elite, many of those busy in this traffic have come to look upon ‘the government’ as an umbrella under whose authority they do their work.
As the business between the big three increases in volume and importance, so does the traffic in personnel. The very criteria for selecting men who will rise come to embody this fact. The corporate commissar, dealing with the state and its military, is wiser to choose a young man who has experienced the state and its military than one who has not. The political director, often dependent for his own political success upon corporate decisions and corporations, is also wiser to choose a man with corporate experience. Thus, by virtue of the very criterion of success, the interchange of personnel and the unity of the power elite is increased.
Given the formal similarity of the three hierarchies in which the several members of the elite spend their working lives, given the ramifications of the decisions made in each upon the others, given the coincidence of interest that prevails among them at many points, and given the administrative vacuum of the American civilian state along with its enlargement of tasks — given these trends of structure, and adding to them the psychological affinities we have noted — we should indeed be surprised were we to find that men said to be skilled in administrative contacts and full of organizing ability would fail to do more than get in touch with one another. They have, of course, done much more than that: increasingly, they assume positions in one another’s domains.
The unity revealed by the interchangeability of top roles rests upon the parallel development of the top, jobs in each of the big three, domains. The interchange occurs most frequently at the points of their coinciding interest, as between regulatory agency as and the regulated industry; contracting agency and contractor. And, as we shall see, it leads to co-ordinations that are more explicit, and even formal.
The inner core of the power elite consists, first, of those who interchange commanding roles at the top of one dominant institutional order with those in another: the admiral who is also a banker and a lawyer and who heads up an important federal commission; the corporation executive whose company was one of the two or three leading war materiel producers who is now the Secretary of Defense; the wartime general who dons civilian clothes to sit on the political directorate and then becomes a member of the board of directors of a leading economic corporation.
Although the executive who becomes a general, the general who becomes a statesman, the statesman who becomes a banker, see much more than ordinary men in their ordinary environments, still the perspectives of even such men often remain tied to their dominant locales. In their very career, however, they interchange roles within the big three and thus readily transcend the particularity of interest in any one of these institutional milieux. By their very careers and activities, they lace the three types of milieux together. They are, accordingly, the core members of the power elite.
These men are not necessarily familiar with every major arena of power. We refer to one man who moves in and between perhaps two circles — say the industrial and the military — and to another man who moves in the military and the political, and to a third who .moves in the political as well as among opinion-makers. These in-between types most closely display our image of the power elite’s structure and operation, even of behind-the-scenes operations. To the extent that there is any ‘invisible elite,’ these advisory and liaison types are its core. Even if — as I believe to be very likely — many of them are, at least in the first part of their careers, ‘agents’ of the various elites rather than themselves elite, it is they who are most active in organizing the several top milieux into a structure of power and maintaining it.
The inner core of the power elite also includes men of the higher legal and financial type from the great law factories and investment firms, who are almost professional go-betweens of economic, political and military affairs, and who thus act to unify the power elite. The corporation lawyer and the investment banker perform the functions of the ‘go-between’ effectively and powerfully. By the nature of their work, they transcend the narrower milieu of any one industry, and accordingly are in a position to speak and act for the corporate world or at least sizable sectors of it. The corporation lawyer is a key link between the economic and military and political areas; the investment banker is a key organizer and unifier of the corporate world and a person well versed in spending the huge amounts of money the American military establishment now ponders. When you get a lawyer who handles the legal work of investment bankers you get a key member of the power elite.
During the Democratic era, one link between private corporate organizations and governmental institutions was the investment house of Dillon, Read. From it came such men as James Forrestal and Charles F. Detmar, Jr.; Ferdinand Eberstadt had once been a partner in it before he branched out into his own investment house from which came other men to political and military circles. Republican administrations seem to favor the investment firm of Kuhn, Loeb and the advertising firm of Batten, Barton, Durstine and Osborn.
Regardless of administrations, there is always the law firm of. Sullivan and Cromwell. Mid-West investment banker Cyrus Eaton has said that ‘Arthur H. Dean, a senior partner of Sullivan & Cromwell. of No. 48 Wall Street’ was one of those who assisted in the drafting of the Securities Act of 1933, the first of the series of bills passed to regulate the capital markets. He and his firm, which is reputed to be the largest in the United States, have maintained close relations with the SEC since its creation, and theirs is the dominating influence on the Commission.’ [12]
There is also the third largest bank in the United States: the Chase National Bank of New York (now Chase-Manhattan). Regardless of political administration, executives of this bank and those of the International Bank of Reconstruction and Development have changed positions: John J. McCloy, who became Chairman of the Chase National in 1953, is a former president of the World Bank; and his successor to the presidency of the World Bank was a former senior vice-president of the Chase National Bank.[13] And in 1953, the president of the Chase National Bank, Winthrop W. Aldrich, had left to become Ambassador to Great Britain.
The outermost fringes of the power elite — which change more than its core — consist of ‘those who count’ even though they may not be ‘in’ on given decisions of consequence nor in their career move between the hierarchies. Each member of the power elite need not be a man who personally decides every decision that is to be ascribed to the power elite. Each member, in the decisions that he does make, takes the others seriously into account. They not only make decisions in the several major areas of war and peace; they are the men who, in decisions in which they take no direct part, are taken into decisive account by those who are directly in charge.
On the fringes and below them, somewhat to the side of the lower echelons, the power elite fades off into the middle levels of power, into the rank and file of the Congress, the pressure groups that are not vested in the power elite itself, as well as a multiplicity of regional and state and local interests. If all the men on the middle levels are not among those who count, they sometimes must be taken into account, handled, cajoled, broken or raised to higher circles.
When the power elite find that in order to get things done they must reach below their own realms — as is the case when it is necessary to get bills passed through Congress — they themselves must exert some pressure. But among the power elite, the name for such high-level lobbying is ‘liaison work.’ There are ‘liaison’ military men with Congress, with certain wayward sections of industry with practically every important element not directly concerned with the power elite. The two men on the White House staff who are named ‘liaison’ men are both experienced in military matters; one of them is a former investment banker and lawyer as well as a general.
Not the trade associations but the higher cliques of lawyers and investment bankers are the active political heads of the corporate rich and the members of the power elite. While it is generally assumed that the national associations carry tremendous weight in formulating public opinion and directing the course of national policy, there is some evidence to indicate that interaction between associations on a formal level is not a very tight-knit affair. The general tendency within associations seems to be to stimulate activities, around the specific interests of the organization, and more effort is made to educate its members rather than to spend much time in trying to influence other associations on the issue at hand … As media for stating and re-stating the over-all value structure of the nation they (the trade associations) are important … But when issues are firmly drawn, individuals related to the larger corporate interests are called upon to exert pressure in the proper places at the strategic time The national associations may act as media for co-ordinating such pressures, but a great volume of intercommunication between members at the apex of power of the larger corporate interests seems to be the decisive factor in final policy determination.’ [14]
Conventional ‘lobbying,’ carried on by trade associations, still exists, although it usually concerns the middle levels of power — usually being targeted at Congress and, of course, its own rank and file members. The important function of the National Association of Manufacturers, for example, is less directly to influence policy than to reveal to small businessmen that their interests are the same as those of larger businesses. But there is also ‘high-level lobbying.’ All over the country the corporate leaders are drawn into the circle of the high military and political through personal friendship, trade and professional associations and their various subcommittees, prestige clubs, open political affiliation, and customer relationships. ‘There is … an awareness among these power leaders,’ one first-hand investigator of such executive cliques has asserted, ‘of many of the current major policy issues before the nation such as keeping taxes down, turning all productive operations over to private enterprises, increasing foreign trade’ keeping governmental welfare and other domestic activities to a minimum, and strengthening and maintaining the hold of the current party in power nationally.’ [15]
There are, in fact, cliques of corporate executives who are more important as informal opinion leaders in the top echelons of corporate, military, and political power than as actual participants in military and political organizations. Inside military circles and inside political circles and ‘on the sidelines’ in the economic area, these circles and cliques of corporation executives are in on most all major decisions regardless of topic. And what is important about all this high-level lobbying is that it is done within the confines of that elite.

6

The conception of the power elite and of its unity rests upon the corresponding developments and the coincidence of interests among economic, political, and military organizations. It also rests upon the similarity of origin and outlook, and the social and personal intermingling of the top circles from each of these dominant hierarchies. This conjunction of institutional and psychological forces, in turn, is revealed by the heavy personnel traffic within and between the big three institutional orders, as well as by the rise of go-betweens as in the high-level lobbying. The conception of the power elite, accordingly, does not rest upon the assumption that American history since the origins of World War II must be understood as a secret plot, or as a great and co-ordinated conspiracy of the members of this elite. The conception rests upon quite impersonal grounds.

There is, however, little doubt that the American power elite — which contains, we are told, some of ‘the greatest organizers in the world’ — has also planned and has plotted. The rise of the elite, as we have already made clear, was not and could not have been caused by a plot; and the tenability of the conception does not rest upon the existence of any secret or any publicly known organization. But, once the conjunction of structural trend and of the personal will to utilize it gave rise to the power elite, then plans and programs did occur to its members and indeed it is not possible to interpret many events and official policies of the fift

One thing one have to acknowledge is that what we have is systemic corruption, rather than individual incidental corruption. Sure Obama is a corrupt egocentric cynic. But he is no closet communist, or a foreigner, or a worshiper of the malignant. He does no evil for evil sake. What he does is the bidding of power groups because that´s how he got to be President, and because it is the path of least resistance. Obama is no different in essence form, say, Bush. The Power elite gets its way because they are organized, concentrate Power and Money, and control the Media. The common man can resist by being informed, understand the issues, and look at policies on their own merits. Most of the public agenda is a charade of false topics to entertain the public and brand the two wings of the Business Party. It is hard to do but one must start from objective understanding: Who´s behind? Why? What are the implications?

Published on Jul 17, 2012

Nobel Prize winning economis, author and lecturer, Joseph Stiglitz, talks about his latest book, THE PRICE OF INEQUALITY: HOW TODAY’S DIVIDED SOCIETY ENDANGERS OUR FUTURE. Joseph Stiglitz spoke at the Cedar Hills Crossing Powell’s Bookstore in Beaverton, Oregon, on June 14th, 2012. To find out more about the author, please visit his website at josephstiglitz.com. This program was produced by pdxjustice Media Productions of Portland, Oregon. To find out more about the work of pdxjustice, please visit our website at pdxjustice.org.

How so?

Are these people mad? Economic growth and job creation at all costs? Is he aware how much of current “production” is outright JUNK&WEAPONS meant only to justify “economic” process? We should discourage automation so that people could keep slaving meaninglessly?


Uploaded on Dec 5, 2011

The gap between rich and poor in OECD countries has reached its highest level for over 30 years, and governments must act quickly to tackle inequality, according to a new OECD report, “Divided We Stand”.

For more information, visit: www.oecd.org/els/social/inequality


Published on Apr 3, 2013
The richest 300 people in the world are more wealthy than the poorest 3 billion combined, and every year rich countries take over 10 times more money from poor countries than they give in aid. Find out more by watching the video or visiting our website http://www.therules.org

-Production Company: Grain Media (grainmedia.co.uk)
-Motion Graphics Artist: Nick Pittom (nickpittom.com)
-Music: Sup Doodle and Apple Juice Kid (AppleJuiceKid.com)
-References: http://www.therules.org/inequality-vi…
-Accompanying article in Al Jazeera: http://www.aljazeera.com/indepth/opin…


Published on Nov 20, 2012
Infographics on the distribution of wealth in America, highlighting both the inequality and the difference between our perception of inequality and the actual numbers. The reality is often not what we think it is.

References:
http://www.motherjones.com/politics/2…
http://danariely.com/2010/09/30/wealt…
http://thinkprogress.org/economy/2011…
http://money.cnn.com/2012/04/19/news/…


C. Wright Mills 1956

The Power Elite


Source: The Power Elite, C. Wright Mills, Oxford University Press, 1956;
Transcribed: by Andy Blunden.

12. The Power Elite

EXCEPT for the unsuccessful Civil War, changes in the power system of the United States have not involved important challenges to its basic legitimations. Even when they have been decisive enough to be called ‘revolutions,’ they have not involved the ‘resort to the guns of a cruiser, the dispersal of an elected assembly by bayonets, or the mechanisms of a police state.’ [1] Nor have they involved, in any decisive way, any ideological struggle to control masses. Changes in the American structure of power have generally come about by institutional shifts in the relative positions of the political, the economic, and the military orders. From this point of view, and broadly speaking, the American power elite has gone through four epochs, and is now well into a fifth.

1

I. During the first — roughly from the Revolution through the administration of John Adams — the social and economic, the political and the military institutions were more or less unified in a simple and direct way: the individual men of these several elites moved easily from one role to another at the top of each of the major institutional orders. Many of them were many-sided men who could take the part of legislator and merchant, frontiersman and soldier, scholar and surveyor.[2]

Until the downfall of the Congressional caucus of 1824, political institutions seemed quite central; political decisions, of great importance; many politicians, considered national statesmen of note. ‘Society, as I first remember it,’ Henry Cabot Lodge once said, speaking of the Boston of his early boyhood, ‘was based on the old families; Doctor Holmes defines them in the “Autocrat” as the families which had held high position in the colony, the province and during the Revolution and the early decades of the United States. They represented several generations of education and standing in the community … They had ancestors who had filled the pulpits, sat upon the bench, and taken part in the government under the crown; who had fought in the Revolution, helped to make the State and National constitutions and served in the army or navy; who had been member’s of the House or Senate in the early days of the Republic, and who had won success as merchants, manufacturers, lawyers, or men of letters.’[3]
Such men of affairs, who — as I have noted — were the backbone of Mrs. John Jay’s social list of 1787, definitely included political figures of note. The important fact about these early days is that social life, economic institutions, military establishment, and political order coincided, and men who were high politicians also played key roles in the economy and, with their families, were among those of the reputable who made up local society. In fact, this first period is marked by the leadership of men whose status does not rest exclusively upon their political position, although their political activities are important and the prestige of politicians high. And this prestige seems attached to the men who occupy Congressional position as well as the cabinet. The elite are political men of education and of administrative experience, and, as Lord Bryce noted, possess a certain largeness of view and dignity of character.’[4]

II. During the early nineteenth century — which followed Jefferson’s political philosophy, but, in due course, Hamilton’s economic principles — the economic and political and military orders fitted loosely into the great scatter of the American social structure. The broadening of the economic order which came to be seated in the individual property owner was dramatized by Jefferson’s purchase of the Louisiana Territory and by the formation of the Democratic-Republican party as successor to the Federalists.

In this society, the ‘elite’ became a plurality of top groups, each in turn quite loosely made up. They overlapped to be sure, but again quite loosely so. One definite key to the period, and certainly to our images of it, is the fact that the Jacksonian Revolution was much more of a status revolution than either an economic or a political one. The metropolitan 400 could not truly flourish in the face of the status tides of Jacksonian democracy; alongside it was a political elite in charge of the new party system. No set of men controlled centralized means of power; no small clique dominated economic, much less political, affairs. The economic order was ascendant over both social status and political power; within the ,economic order, a quite sizable proportion of all the economic men were among those who decided. For this was the period — roughly from Jefferson to Lincoln — when the elite was at most a loose coalition. The period ended, of course, with the decisive split of southern and northern types.
Official commentators like to contrast the ascendancy in totalitarian countries of a tightly organized clique with the American .system of power. Such comments, however, are easier to sustain if one compares mid-twentieth-century Russia with mid-nineteenth-century America, which is what is often done by Tocqueville-quoting Americans making the contrast. But that was an America of a century ago, and in the century that has passed, the American elite have not remained as patrioteer essayists have described them to us. The ‘loose cliques’ now head institutions of a scale and power not then existing and, especially since World War I, the loose cliques have tightened up. We are well beyond the era of romantic pluralism.

III. The supremacy of corporate economic power began, in a formal way, with the Congressional elections of 1866, and was consolidated by the Supreme Court decision of 1886 which declared that the Fourteenth Amendment protected the corporation. That period witnessed the transfer of the center of initiative from government to corporation. Until the First World War (which gave us an advanced showing of certain features of our own period) this was an age of raids on the government by the economic elite, an age of simple corruption, when Senators and judges were simply bought up. Here, once upon a time, in the era of McKinley and Morgan, far removed from the undocumented complexities of our own time, many now believe, was the golden era of the American ruling class.[5]

The military order of this period, as in the second, was subordinate to the political, which in turn was subordinate to the economic. The military was thus off to the side of the main driving forces of United States history. Political institutions in the United States have never formed a centralized and autonomous domain of power; they have been enlarged and centralized only reluctantly in slow response to the public consequence of the corporate economy.
In the post-Civil-War era, that economy was the dynamic; the ‘trusts’ — as policies and events make amply clear — could readily use the relatively weak governmental apparatus for their own ends. That both state and federal governments were decisively limited in their power to regulate, in fact meant that they were themselves regulatable by the larger moneyed interests. Their powers were scattered and unorganized; the powers of the industrial and financial corporations concentrated and interlocked. The Morgan interests alone held 341 directorships in 112 corporations with an aggregate capitalization of over $22 billion — over three times the assessed value of all real and personal property in New England.[6] With revenues greater and employees more numerous than those of many states, corporations controlled parties, bought laws, and kept Congressmen of the ‘neutral’ state. And as private economic power overshadowed public political power, so the economic elite overshadowed the political.
Yet even between 1896 and 1919, events of importance tended to assume a political form, foreshadowing the shape of power which after the partial boom of the ‘twenties was to prevail in the New Deal. Perhaps there has never been any period in American history so politically transparent as the Progressive era of President-makers and Muckrakers.

IV. The New Deal did not reverse the political and economic relations of the third era, but it did create within the political arena, as well as in the corporate world itself, competing centers of power that challenged those of the corporate directors. As the New Deal directorate gained political power, the economic elite, which in the third period had fought against the growth of ‘government’ while raiding it for crafty privileges, belatedly attempted to join it on the higher levels. When they did so they found themselves confronting other interests and men, for the places of decision were crowded. In due course, they did come to control and to use for their own purposes the New Deal institutions whose creation they had so bitterly denounced.

But during the ‘thirties’ the political order was still an instrument of small propertied farmers and businessmen, although they were weakened, having lost their last chance for real ascendancy in the Progressive era. The struggle between big and small property flared up again, however, in the political realm of the New Deal era, and to this struggle there was added, as we have seen, the new struggle of organized labor and the unorganized unemployed, This new force flourished under political tutelage, but nevertheless, for the first time in United States history, social legislation and lower-class issues became important features of the reform movement.
In the decade of the ‘thirties, a set of shifting balances involving newly instituted farm measures and newly organized labor unions — along with big business — made up the political and administrative drama of power. These farm, labor, and business groups, moreover, were more or less contained within the framework of an enlarging governmental structure, whose political directorship made decisions in a definitely political manner. These groups pressured, and in pressuring against one another and against the governmental and party system, they helped to shape it. But it, could not be said that any of them for any considerable length of time used that government unilaterally as their instrument. That is why the ‘thirties was a political decade: the power of business was not replaced, but it was contested and supplemented: it became one major power within a structure of power that was chiefly run by political men, and not by economic or military men turned political.
The earlier and middle Roosevelt administrations can best be understood as a desperate search for ways and means, within the existing capitalist system, of reducing the staggering and ominous xis army of the unemployed. In these years, the New Deal as a system of power was essentially a balance of pressure groups and interest blocs. The political top adjusted many conflicts, gave way to this demand, sidetracked that one, was the unilateral servant of none, and so evened it all out into such going policy line as prevailed from one minor crisis to another. Policies were the result of a political act of balance at the top. Of course, the balancing act that Roosevelt performed did not affect the fundamental institutions of capitalism as a type of economy. By his policies, he subsidized the defaults of the capitalist economy, which had simply broken down; and by his rhetoric, he balanced its political disgrace, putting ‘economic royalists’ in the political doghouse.
The ‘welfare state,’ created to sustain the balance and to carry out the subsidy, differed from the ‘laissez-faire’ state: ‘If the state was believed neutral in the days of T.R. because its leaders claimed to sanction favors for no one,’ Richard Hofstadter has remarked, ‘the state under F.D.R. could be called neutral only in the sense that it offered favors to everyone.’ [7] The new state of the corporate commissars differs from the old welfare state. In fact, the later Roosevelt years — beginning with the entrance of the United States into overt acts of war and preparations for World War II cannot be understood entirely in terms of an adroit equipoise of political power.

2

We study history, it has been said, to rid ourselves of it, and the history of the power elite is a clear case for which this maxim is correct. Like the tempo of American life in general, the long term trends of the power structure have been greatly speeded up since World War II, and certain newer trends within and between the dominant institutions have also set the shape of the power elite and given historically specific meaning to its fifth epoch:
I. In so far as the structural clue to the power elite today lies in the political order, that clue is the decline of politics as genuine and public debate of alternative decisions — with nationally responsible and policy-coherent parties and with autonomous organizations connecting the lower and middle levels of power with the top levels of decision. America is now in considerable part more a formal political democracy than a democratic social structure, and even the formal political mechanics are weak.

The long-time tendency of business and government to become more intricately and deeply involved with each either has, in the fifth epoch, reached a new point of explicitness. The two cannot now be seen clearly as two distinct worlds. It is in terms of the executive agencies of the state that the rapprochement has proceeded most decisively. The growth of the executive branch of the government, with its agencies that patrol the complex economy, does not mean merely the ‘enlargement of government’ as some sort of autonomous bureaucracy: it has meant the ascendancy of the corporation’s man as a political eminence.
During the New Deal the corporate chieftains joined the political directorate; as of World War II they have come to dominate it. Long interlocked with government, now they have moved into quite full direction of the economy of the war effort and of the postwar era. This shift of the corporation executives into the political directorate has accelerated the long-term relegation of the professional politicians in the Congress to the middle levels of power.

II. In so far as the structural clue to the power elite today lies in the enlarged and military state, that clue becomes evident in the military ascendancy. The warlords have gained decisive Political relevance, and the military structure of America is now in considerable part a political structure. The seemingly permanent military threat places a premium on the military and upon their control of men, materiel, money, and power; virtually all political and economic actions are now judged in terms of military definitions of reality: the higher warlords have ascended to a firm position within the power elite of the fifth epoch.

In part at least this has resulted from one simple historical fact, pivotal for the years since 1939: the focus of elite attention has been shifted from domestic problems, centered in the ‘thirties around slump, to international problems, centered in the ‘forties and ‘fifties around war. Since the governing apparatus of the United States has by long historic usage been adapted to and shaped by domestic clash and balance, it has not, from any angle, had suitable agencies and traditions for the handling of international problems. Such formal democratic mechanics as had arisen in the century and a half of national development prior to 1941, had not been extended to the American handling of international affairs. It is, in considerable part, in this vacuum that the power elite has grown.
III. In so far as the structural clue to the power elite today lies in the economic order, that clue is the fact that the economy is at once a permanent-war economy and a private-corporation economy. American capitalism is now in considerable part a military capitalism, and the most important relation of the big corporation to the state rests on the coincidence of interests between military and corporate needs, as defined by warlords and corporate rich. Within the elite as a whole, this coincidence of interest between the high military and the corporate chieftains strengthens both of them and further subordinates the role of the merely political men. Not politicians, but corporate executives, sit with the military and plan the organization of war effort.
The shape and meaning of the power elite today can be understood only when these three sets of structural trends are seen at their point of coincidence: the military capitalism of private corporations exists in a weakened and formal democratic system containing a military order already quite political in outlook and demeanor. Accordingly, at the top of this structure, the power elite has been shaped by the coincidence of interest between those who control the major means of production and those who control the newly enlarged means of violence; from the decline of the professional politician and the rise to explicit political command of the corporate chieftains and the professional warlords; from the absence of any genuine civil service of skill and integrity, independent of vested interests.
The power elite is composed of political, economic, and military men, but this instituted elite is frequently in some tension: it comes together only on certain coinciding points and only on certain occasions of ‘crisis.’ In the long peace of the nineteenth century, the military were not in the high councils of state, not of the political directorate, and neither were the economic men — they made raids upon the state but they did not join its directorate. During the ‘thirties, the political man was ascendant. Now the military and the corporate men are in top positions.
Of the three types of circle that compose the power elite today, it is the military that has benefited the most in its enhanced power, although the corporate circles have also become more explicitly intrenched in the more public decision-making circles. It is the professional politician that has lost the most, so much that in examining the events and decisions, one is tempted to speak of a political vacuum in which the corporate rich and the high warlord, in their coinciding interests, rule.
It should not be said that the three ‘take turns’ in carrying the initiative, for the mechanics of the power elite are not often as deliberate as that would imply. At times, of course, it is — as when ‘political men’ thinking they can borrow the prestige of generals, find that they must pay for it, or, as when during big slumps, economic men feel the need of a politician at once safe and possessing vote appeal. Today all three are involved in virtually all widely ramifying decisions. Which of the three types seems to lead depends upon ‘the tasks of the period’ as they, the elite, define them. Just now, these tasks center upon ‘defense’ and international affairs. Accordingly, as we have seen, the military are ascendant in two senses: as personnel and as justifying ideology. That is why, just now, we can most easily specify the unity and the shape of the power elite in terms of the military ascendancy.
But we must always be historically specific and open to complexities. The simple Marxian view makes the big economic man the real holder of power; the simple liberal view makes the big Political man the chief of the power system; and there are some who would view the warlords as virtual dictators. Each of these is an oversimplified view. It is to avoid them that we use the term ,power elite, rather than, for example, ‘ruling class.’
[‘Ruling class’ is a badly loaded phrase. ‘Class’ is an economic term; ‘rule’ a political one. The phrase, ‘ruling class,’ thus contains the theory that an economic class rules politically. That short-cut theory may or may not at times be true, but we do not want to carry that one rather simple theory about in the terms that we use to define our problems; we wish to state the theories explicitly, using terms of more precise and unilateral meaning. Specifically, the phrase ‘ruling class,’ in its common political connotations, does not allow enough autonomy to the political order and its agents, and it says nothing about the military as such. It should be clear to the reader by now that we do not accept as adequate the simple view that high economic men unilaterally make all decisions of national consequence. We hold that such a simple view of ‘economic determinism’ must be elaborated by ‘political determinism’ and ‘military determinism’; that the higher agents of each of these three domains now often have a noticeable degree of autonomy; and that only in the often intricate ways of coalition do they make up and carry through the most important decisions. Those are the major reasons we prefer ‘power elite’ to ‘ruling class’ as a characterizing phrase for the higher circles when we consider them in terms of power.]
In so far as the power elite has come to wide public attention, it has done so in terms of the ‘military clique.’ The power elite does, in fact, take its current shape from the decisive entrance into it of the military. Their presence and their ideology are its major legitimations, whenever the power elite feels the need to provide any. But what is called the ‘Washington military clique’ is not composed merely of military men, and it does not prevail merely in Washington. Its members exist all over the country, and it is a coalition of generals in the roles of corporation executives, of politicians masquerading as admirals, of corporation executives acting like politicians, of civil servants who become majors, of vice-admirals who are also the assistants to a cabinet officer, who is himself, by the way, really a member of the managerial elite.
Neither the idea of a ‘ruling class’ nor of a simple monolithic rise of ‘bureaucratic politicians’ nor of a ‘military clique’ is adequate. The power elite today involves the often uneasy coincidence of economic, military, and political power.

3

Even if our understanding were limited to these structural trends, we should have grounds for believing the power elite a useful, indeed indispensable, concept for the interpretation of what is going on at the topside of modem American society. But we are not, of course, so limited: our conception of the power elite do not need to rest only upon the correspondence of the institutional hierarchies involved, or upon the many points at which their shifting interests coincide. The ‘power elite’ as we conceive it, also rests upon the similarity of its personnel, and their personal and official relations with one another, upon their social and psychological affinities. In order to grasp the personal and social basis of the power elite’s unity, we have first to remind ourselves of the facts of origin, career, and style of life of each of the types of circle whose members compose the power elite.
The power elite is not an aristocracy, which is to say that it is not a political ruling group based upon a nobility of hereditary origin. It has no compact basis in a small circle of great families whose members can and do consistently occupy the top positions in the several higher circles which overlap as the power elite. But such nobility is only one possible basis of common origin. That it does not exist for the American elite does not mean that members of this elite derive socially from the full range of strata composing American society. They derive in substantial proportions from the upper classes, both new and old, of local society and the metropolitan 400. The bulk of the very rich, the corporate executives, the political outsiders, the high military, derive from, at most, the upper third of the income and occupational pyramids. Their fathers were at least of the professional and business strata, and very frequently higher than that. They are native-born Americans of native parents, primarily from urban areas, and, with the exceptions of the politicians among them, overwhelmingly from the East. They are mainly Protestants, especially Episcopalian or Presbyterian. In general, the higher the position, the greater the proportion of men within it who have derived from and who maintain connections with the upper classes. The generally similar origins of the members of the power elite are underlined and carried further by the fact of their increasingly common educational routine. Overwhelmingly college graduates substantial proportions have attended Ivy League colleges, although the education of the higher military, of course, differs from that of other members of the power elite.
But what do these apparently simple facts about the social composition of the higher circles really mean? In particular, what do they mean for any attempt to understand the degree of unity, and the direction of policy and interest that may prevail among these several circles? Perhaps it is best to put this question in a deceptively simple way: in terms of origin and career, who or what do these men at the top represent?
Of course, if they are elected politicians, they are supposed to represent those who elected them; and, if they are appointed, they are supposed to represent, indirectly, those who elected their appointers. But this is recognized as something of an abstraction, as a rhetorical formula by which all men of power in almost all systems of government nowadays justify their power of decision. M times it may be true, both in the sense of their motives and in the sense of who benefits from their decisions. Yet it would not be wise in any power system merely to assume it.
The fact that members of the power elite come from near the top of the nation’s class and status levels does not mean that they are necessarily ‘representative’ of the top levels only. And if they were, as social types, representative of a cross-section of the population, that would not mean that a balanced democracy of interest and power would automatically be the going political fact.
We cannot infer the direction of policy merely from the social origins and careers of the policy-makers. The social and economic backgrounds of the men of power do not tell us all that we need to know in order to understand the distribution of social power. For: (1) Men from high places may be ideological representatives of the poor and humble. (2) Men of humble origin, brightly self-made, may energetically serve the most vested and inherited interests. Moreover (3), not all men who effectively represent the interests of a stratum need in any way belong to it or personally benefit by policies that further its interests. Among the politicians, in short, there are sympathetic agents of given groups, conscious and unconscious, paid and unpaid. Finally (4), among the top decision-makers we find men who have been chosen for their positions because of their ‘expert knowledge.’ These are some of the obvious reasons why the social origins and careers of the power elite do not enable us to infer the class interests and policy directions of a modem system of power.
Do the high social origin and careers of the fop men mean nothing, then, about the distribution of power? By no means. They simply remind us that we must be careful of any simple and direct inference from origin and career to political character and policy, not that we must ignore them in our attempt at political understanding. They simply mean that we must analyze the political psychology and the actual decisions of the political directorate as well as its social composition. And they mean, above all, that we should control, as we have done here, any inference we make from the origin and careers of the political actors by close understanding of the institutional landscape in which they act out their drama. Otherwise we should be guilty of a rather simple-minded biographical theory of society and history.
Just as we cannot rest the notion of the power elite solely upon the institutional mechanics that lead to its formation, so we cannot rest the notion solely upon the facts of the origin and career of its personnel. We need both, and we have both — as well as other bases, among them that of the status intermingling.
But it is not only the similarities of social origin, religious affiliation, nativity, and education that are important to the psychological and social affinities of the members of the power elite. Even if their recruitment and formal training were more heterogeneous than they are, these men would still be of quite homogeneous social type. For the most important set of facts about a circle of men is the criteria of admission, of praise, of honor, of promotion that prevails among them; if these are similar within a circle, then they will tend as personalities to become similar. he circles that compose the power elite do tend to have such codes and criteria in common. The co-optation of the social types to which these common values lead is often more important than any statistics of common origin and career that we might have at hand.
There is a kind of reciprocal attraction among the fraternity of the successful — not between each and every member of the circles of the high and mighty, but between enough of them to insure a certain unity. On the slight side, it is a sort of tacit, mutual admiration; in the strongest tie-ins, it proceeds by intermarriage. And there are all grades and types of connection between these extremes. Some overlaps certainly occur by means of cliques and clubs, churches and schools.
If social origin and formal education in common tend to make the members of the power elite more readily understood and trusted by one another, their continued association further cements what they feel they have in common. Members of the several higher circles know one another as personal friends and even as neighbors; they mingle with one another on the golf course, in the gentleman’s clubs, at resorts, on transcontinental airplanes, and on ocean liners. They meet at the estates of mutual friends, face each other in front of the TV camera, or serve on the same philanthropic committee; and many are sure to cross one another’s path in the columns of newspapers, if not in the exact cafes from which many of these columns originate. As we have seen, of ‘The New 400’ of café society, one chronicler has named forty-one members of the very rich, ninety-three political leaders, and seventy-nine chief executives of corporations.
‘I did not know, I could not have dreamed,’ Whittaker Chambers has written, ‘of the immense scope and power of Hiss’ political alliances and his social connections, which cut across all party lines and ran from the Supreme Court to the Religious Society of Friends, from governors of states and instructors in college faculties to the staff members of liberal magazines. In the decade since I had last seen him’ he had used his career, and, in particular, his identification with the cause of peace through his part in organizing the United Nations, to put down roots that made him one with the matted forest floor of American upper class, enlightened middle class, liberal and official life. His roots could not be disturbed without disturbing all the roots on all sides of him.’ [8]
The sphere of status has reflected the epochs of the power elite. In the third epoch, for example, who could compete with ‘big money’? And in the fourth, with big politicians, or even the bright young men of the New Deal? And in the fifth, who can compete with the generals and the admirals and the corporate officials now so sympathetically portrayed on the stage, in the novel, and on the screen? Can one imagine Executive Suite as a successful motion picture in 1935? Or The Caine Mutiny?
The multiplicity of high-prestige organizations to which the elite usually belong is revealed by even casual examination of the obituaries of the big businessman, the high-prestige lawyer, the top general and admiral, the key senator: usually, high-prestige church, business associations, plus high-prestige clubs, and often plus military rank. In the course of their lifetimes, the university president, the New York Stock Exchange chairman, the head of the bank, the old West Pointer — mingle in the status sphere, within which they easily renew old friendships and draw upon them in an effort to understand through the experience of trusted others those contexts of power and decision in which they have not personally moved.
In these diverse contexts, prestige accumulates in each of the higher circles, and the members of each borrow status from one another. Their self-images are fed by these accumulations and these borrowings, and accordingly, however segmental a given man’s role may seem, he comes to feel himself a ‘diffuse’ or ‘generalized’ man of the higher circles. a ‘broad-gauge’ man. Perhaps such inside experience is one feature of what is meant by ‘judgment.’
The key organizations, perhaps, are the major corporations themselves, for on the boards of directors we find a heavy overlapping among the members of these several elites. On the lighter side, again in the summer and winter resorts, we find that, in an intricate series of overlapping circles; in the course of time, each meets each or knows somebody who knows somebody who knows that one.
The higher members of the military, economic, and political orders are able readily to take over one another’s point of view, always in a sympathetic way, and often in a knowledgeable way as well. They define one another as among those who count, and who, accordingly, must be taken into account. Each of them as a member of the power elite comes to incorporate into his own integrity, his own honor, his own conscience, the viewpoint, the expectations, the values of the others. If there are n o common ideals and standards among them that are based upon an explicitly aristocratic culture, that does not mean that they do not feel responsibility to one another.
All the structural coincidence of their interests as well as the intricate, psychological facts of their origins and their education, their careers and their associations make possible the psychological affinities that prevail among them, affinities that make it possible for them to say of one another: He is, of course, one of us. And all this points to the basic, psychological meaning of class consciousness. Nowhere in America is there as great a ‘class consciousness’ as among the elite; nowhere is it organized as effectively as among the power elite. For by class consciousness, as a psychological fact, one means that the individual member of a ‘class’ accepts only those accepted by his circle as among those who are significant to his own image of self.
Within the higher circles of the power elite, factions do exist; there are conflicts of policy; individual ambitions do clash. There are still enough divisions of importance within the Republican party, and even between Republicans and Democrats, to make for different methods of operation. But more powerful than these divisions are the internal discipline and the community of interests that bind the power elite together, even across the boundaries of nations at war.[9]

4

Yet we must give due weight to the other side of the case which may not question the facts but only our interpretation of them. There is a set of objections that will inevitably be made to our whole conception of the power elite, but which has essentially to do with only the psychology of its members. It might well be put by liberals or by conservatives in some such way as this:

‘To talk of a power elite — isn’t this to characterize men by their origins and associations? Isn’t such characterization both unfair and untrue? Don’t men modify themselves, especially Americans such as these, as they rise in stature to meet the demands of their jobs? Don’t they arrive at a view and a line of policy that represents, so far as they in their human weaknesses can know, the interests of the nation as a whole? Aren’t they merely honorable men who are doing their duty?’
What are we to reply to these objections?

I. We are sure that they are honorable men. But what is honor? Honor can only mean living up to a code that one believes to be honorable. There is no one code upon which we are all agreed. That is why, if we are civilized men, we do not kill off all of those with whom we disagree. The question is not: are these honorable men? The question is: what are their codes of honor? The answer to that question is that they are the codes of their circles, of those to whose opinions they defer. How could it be otherwise? That is one meaning of the important truism that all men are human and that all men are social creatures. As for sincerity, it can only be disproved, never proved.
II. To the question of their adaptability — which means their capacity to transcend the codes of conduct which, in their life’s work and experience, they have acquired — we must answer: simply no, they cannot, at least not in the handful of years most of them have left. To expect that is to assume that they are — indeed strange and expedient: such flexibility would in fact involve a violation of what we may rightly call their character and their integrity. By the way, may it not be precisely because of the lack of such character and integrity that earlier types of American politicians have not represented as great a threat as do these men of character?

It would be an insult to the effective training of the military, and to their indoctrination as well, to suppose that military officials. shed their military character and outlook upon changing from, uniform to mufti. This background is more important perhaps in the military case than in that of the corporate executives, for the training of the career is deeper and more total.
‘Lack of imagination,’ Gerald W. Johnson has noted, ‘is not to be confused with lack of principle. On the contrary, an unimaginative man is often a man of the highest principles. The trouble is that his principles conform to Cornford’s famous definition: “A principle is a rule of inaction giving valid general reasons for not doing in a specific instance what to unprincipled instinct would seem to be right.”’ [10]
Would it not be ridiculous, for example, to believe seriously that, in psychological fact, Charles Erwin Wilson represented anyone or any interest other than those of the corporate world? This is not because he is dishonest; on the contrary, it is because he is probably a man of solid integrity — as sound as a dollar. He is what he is and he cannot very well be anything else. He is a member of the professional corporation elite, just as are his colleagues, in the government and out of it; he represents the wealth of the higher corporate world; he represents its power; and he believes sincerely in his oft-quoted remark that ‘what is good for the United States is good for the General Motors Corporation and vice versa.’
The revealing point about the pitiful hearings on the confirmation of such men for political posts is not the cynicism toward the law and toward the law-makers on the middle levels of power which they display, nor their reluctance to dispose of their personal stock.” The interesting point is how impossible it is for such men to divest themselves of their engagement with the corporate world in general and with their own corporations in particular. Not only their money, but their friends, their interests, their training — their lives in short — are deeply involved in this world. The disposal of stock is, of course, merely a purifying ritual. The point is not so much financial or personal interests in a given corporation, but identification with the corporate world. To ask a man suddenly to divest himself of these interests and sensibilities is almost like asking a man to become a woman.

III. To the question of their patriotism, of their desire to serve the nation as a whole, we must answer first that, like codes of honor feelings of patriotism and views of what is to the whole nation’s good, are not ultimate facts but matters upon which there exists a great variety of opinion. Furthermore, patriotic opinions too are rooted in and die sustained by what a man has become by virtue of how and with whom he has lived. This is no simple mechanical determination of individual character by social conditions; it is an intricate process, well established in the major tradition of modern social study. One can only wonder why more social scientists do not use it systematically in speculating about politics.
IV. The elite cannot be truly thought of as men who are merely doing their duty. They are the ones who determine their duty, as well as the duties of those beneath them. They are not merely following orders: they give the orders. They are not merely ‘bureaucrats’: they command bureaucracies. They may try to disguise these facts from others and from themselves by appeals to traditions of which they imagine themselves the instruments, but there are many traditions, and they must choose which ones they will serve. They face decisions for which there simply are no traditions.

Now, to what do these several answers add up? To the fact that we cannot reason about public events and historical trends merely from knowledge about the motives and character of the men or the small groups who sit in the seats of the high and mighty. This fact, in turn, does not mean that we should be intimidated by accusations that in taking up our problem in the way we have, we are impugning the honor, the integrity, or the ability of those who are in high office. For it is not, in the first instance, a question of individual character; and if, in further instances, we find that it is, we should not hesitate to say so plainly. In the meantime, we must judge men of power by the standards of power, by what they do as decision-makers, and not by who they are or what they may do in private life. Our interest is not in that., we are interested in their policies and in the consequences of their conduct of office. .We must remember that these men of the power elite now occupy the strategic places in the structure of American society; that they command the dominant institutions of a dominant nation; that, as a set of men, they are in a position to make decisions with terrible consequences for the underlying populations of the world.

5

Despite their social similarity and psychological affinities, the members of the power elite do not constitute a club having a permanent membership with fixed and formal boundaries. It is of the nature of the power elite that within it there is a good deal of shifting about, and that it thus does not consist of one small set of the same men in the same positions in the same hierarchies. Because men know each other personally does not mean that among them there is a unity of policy; and because they do not know each other personally does not mean that among them there is a disunity. The conception of the power elite does not rest, as I have repeatedly said, primarily upon personal friendship.

As the requirements of the top places in each of the major hierarchies become similar, the types of men occupying these roles at the top — by selection and by training in the jobs — become similar. This is no mere deduction from structure to personnel. That it is a fact is revealed by the heavy traffic that has been going on between the three structures, often in very intricate patterns. The chief executives, the warlords, and selected politicians came into contact with one another in an intimate, working way during World War 11; after that war ended, they continued their associations, out of common beliefs, social congeniality, and coinciding interests. Noticeable proportions of top men from the military, the economic, and the political worlds have during the last fifteen years occupied positions in one or both of the other worlds: between these higher circles there is an interchangeability of position, based formally upon the supposed transferability of ‘executive ability,’ based in substance upon the co-optation by cliques of insiders. As members of a power elite, many of those busy in this traffic have come to look upon ‘the government’ as an umbrella under whose authority they do their work.
As the business between the big three increases in volume and importance, so does the traffic in personnel. The very criteria for selecting men who will rise come to embody this fact. The corporate commissar, dealing with the state and its military, is wiser to choose a young man who has experienced the state and its military than one who has not. The political director, often dependent for his own political success upon corporate decisions and corporations, is also wiser to choose a man with corporate experience. Thus, by virtue of the very criterion of success, the interchange of personnel and the unity of the power elite is increased.
Given the formal similarity of the three hierarchies in which the several members of the elite spend their working lives, given the ramifications of the decisions made in each upon the others, given the coincidence of interest that prevails among them at many points, and given the administrative vacuum of the American civilian state along with its enlargement of tasks — given these trends of structure, and adding to them the psychological affinities we have noted — we should indeed be surprised were we to find that men said to be skilled in administrative contacts and full of organizing ability would fail to do more than get in touch with one another. They have, of course, done much more than that: increasingly, they assume positions in one another’s domains.
The unity revealed by the interchangeability of top roles rests upon the parallel development of the top, jobs in each of the big three, domains. The interchange occurs most frequently at the points of their coinciding interest, as between regulatory agency as and the regulated industry; contracting agency and contractor. And, as we shall see, it leads to co-ordinations that are more explicit, and even formal.
The inner core of the power elite consists, first, of those who interchange commanding roles at the top of one dominant institutional order with those in another: the admiral who is also a banker and a lawyer and who heads up an important federal commission; the corporation executive whose company was one of the two or three leading war materiel producers who is now the Secretary of Defense; the wartime general who dons civilian clothes to sit on the political directorate and then becomes a member of the board of directors of a leading economic corporation.
Although the executive who becomes a general, the general who becomes a statesman, the statesman who becomes a banker, see much more than ordinary men in their ordinary environments, still the perspectives of even such men often remain tied to their dominant locales. In their very career, however, they interchange roles within the big three and thus readily transcend the particularity of interest in any one of these institutional milieux. By their very careers and activities, they lace the three types of milieux together. They are, accordingly, the core members of the power elite.
These men are not necessarily familiar with every major arena of power. We refer to one man who moves in and between perhaps two circles — say the industrial and the military — and to another man who moves in the military and the political, and to a third who .moves in the political as well as among opinion-makers. These in-between types most closely display our image of the power elite’s structure and operation, even of behind-the-scenes operations. To the extent that there is any ‘invisible elite,’ these advisory and liaison types are its core. Even if — as I believe to be very likely — many of them are, at least in the first part of their careers, ‘agents’ of the various elites rather than themselves elite, it is they who are most active in organizing the several top milieux into a structure of power and maintaining it.
The inner core of the power elite also includes men of the higher legal and financial type from the great law factories and investment firms, who are almost professional go-betweens of economic, political and military affairs, and who thus act to unify the power elite. The corporation lawyer and the investment banker perform the functions of the ‘go-between’ effectively and powerfully. By the nature of their work, they transcend the narrower milieu of any one industry, and accordingly are in a position to speak and act for the corporate world or at least sizable sectors of it. The corporation lawyer is a key link between the economic and military and political areas; the investment banker is a key organizer and unifier of the corporate world and a person well versed in spending the huge amounts of money the American military establishment now ponders. When you get a lawyer who handles the legal work of investment bankers you get a key member of the power elite.
During the Democratic era, one link between private corporate organizations and governmental institutions was the investment house of Dillon, Read. From it came such men as James Forrestal and Charles F. Detmar, Jr.; Ferdinand Eberstadt had once been a partner in it before he branched out into his own investment house from which came other men to political and military circles. Republican administrations seem to favor the investment firm of Kuhn, Loeb and the advertising firm of Batten, Barton, Durstine and Osborn.
Regardless of administrations, there is always the law firm of. Sullivan and Cromwell. Mid-West investment banker Cyrus Eaton has said that ‘Arthur H. Dean, a senior partner of Sullivan & Cromwell. of No. 48 Wall Street’ was one of those who assisted in the drafting of the Securities Act of 1933, the first of the series of bills passed to regulate the capital markets. He and his firm, which is reputed to be the largest in the United States, have maintained close relations with the SEC since its creation, and theirs is the dominating influence on the Commission.’ [12]
There is also the third largest bank in the United States: the Chase National Bank of New York (now Chase-Manhattan). Regardless of political administration, executives of this bank and those of the International Bank of Reconstruction and Development have changed positions: John J. McCloy, who became Chairman of the Chase National in 1953, is a former president of the World Bank; and his successor to the presidency of the World Bank was a former senior vice-president of the Chase National Bank.[13] And in 1953, the president of the Chase National Bank, Winthrop W. Aldrich, had left to become Ambassador to Great Britain.
The outermost fringes of the power elite — which change more than its core — consist of ‘those who count’ even though they may not be ‘in’ on given decisions of consequence nor in their career move between the hierarchies. Each member of the power elite need not be a man who personally decides every decision that is to be ascribed to the power elite. Each member, in the decisions that he does make, takes the others seriously into account. They not only make decisions in the several major areas of war and peace; they are the men who, in decisions in which they take no direct part, are taken into decisive account by those who are directly in charge.
On the fringes and below them, somewhat to the side of the lower echelons, the power elite fades off into the middle levels of power, into the rank and file of the Congress, the pressure groups that are not vested in the power elite itself, as well as a multiplicity of regional and state and local interests. If all the men on the middle levels are not among those who count, they sometimes must be taken into account, handled, cajoled, broken or raised to higher circles.
When the power elite find that in order to get things done they must reach below their own realms — as is the case when it is necessary to get bills passed through Congress — they themselves must exert some pressure. But among the power elite, the name for such high-level lobbying is ‘liaison work.’ There are ‘liaison’ military men with Congress, with certain wayward sections of industry with practically every important element not directly concerned with the power elite. The two men on the White House staff who are named ‘liaison’ men are both experienced in military matters; one of them is a former investment banker and lawyer as well as a general.
Not the trade associations but the higher cliques of lawyers and investment bankers are the active political heads of the corporate rich and the members of the power elite. While it is generally assumed that the national associations carry tremendous weight in formulating public opinion and directing the course of national policy, there is some evidence to indicate that interaction between associations on a formal level is not a very tight-knit affair. The general tendency within associations seems to be to stimulate activities, around the specific interests of the organization, and more effort is made to educate its members rather than to spend much time in trying to influence other associations on the issue at hand … As media for stating and re-stating the over-all value structure of the nation they (the trade associations) are important … But when issues are firmly drawn, individuals related to the larger corporate interests are called upon to exert pressure in the proper places at the strategic time The national associations may act as media for co-ordinating such pressures, but a great volume of intercommunication between members at the apex of power of the larger corporate interests seems to be the decisive factor in final policy determination.’ [14]
Conventional ‘lobbying,’ carried on by trade associations, still exists, although it usually concerns the middle levels of power — usually being targeted at Congress and, of course, its own rank and file members. The important function of the National Association of Manufacturers, for example, is less directly to influence policy than to reveal to small businessmen that their interests are the same as those of larger businesses. But there is also ‘high-level lobbying.’ All over the country the corporate leaders are drawn into the circle of the high military and political through personal friendship, trade and professional associations and their various subcommittees, prestige clubs, open political affiliation, and customer relationships. ‘There is … an awareness among these power leaders,’ one first-hand investigator of such executive cliques has asserted, ‘of many of the current major policy issues before the nation such as keeping taxes down, turning all productive operations over to private enterprises, increasing foreign trade’ keeping governmental welfare and other domestic activities to a minimum, and strengthening and maintaining the hold of the current party in power nationally.’ [15]
There are, in fact, cliques of corporate executives who are more important as informal opinion leaders in the top echelons of corporate, military, and political power than as actual participants in military and political organizations. Inside military circles and inside political circles and ‘on the sidelines’ in the economic area, these circles and cliques of corporation executives are in on most all major decisions regardless of topic. And what is important about all this high-level lobbying is that it is done within the confines of that elite.

6

The conception of the power elite and of its unity rests upon the corresponding developments and the coincidence of interests among economic, political, and military organizations. It also rests upon the similarity of origin and outlook, and the social and personal intermingling of the top circles from each of these dominant hierarchies. This conjunction of institutional and psychological forces, in turn, is revealed by the heavy personnel traffic within and between the big three institutional orders, as well as by the rise of go-betweens as in the high-level lobbying. The conception of the power elite, accordingly, does not rest upon the assumption that American history since the origins of World War II must be understood as a secret plot, or as a great and co-ordinated conspiracy of the members of this elite. The conception rests upon quite impersonal grounds.

There is, however, little doubt that the American power elite — which contains, we are told, some of ‘the greatest organizers in the world’ — has also planned and has plotted. The rise of the elite, as we have already made clear, was not and could not have been caused by a plot; and the tenability of the conception does not rest upon the existence of any secret or any publicly known organization. But, once the conjunction of structural trend and of the personal will to utilize it gave rise to the power elite, then plans and programs did occur to its members and indeed it is not possible to interpret many events and official policies of the fifth epoch without reference to the power elite. ‘There is a great difference,’ Richard Hofstadter has remarked, ‘between locating conspiracies in history and saying that history is, in effect, a conspiracy …’ [16]
The structural trends of institutions become defined as opportunities by those who occupy their command posts. Once such opportunities are recognized, men may avail themselves of them. Certain types of men from each of the dominant institutional areas, more far-sighted than others, have actively promoted the liaison before it took its truly modem shape. They have often done so for reasons not shared by their partners, although not objected to by them either; and often the outcome of their liaison has had consequences which none of them foresaw, much less shaped, and which only later in the course of development came under explicit control. Only after it was well under way did most of its members find themselves part of it and become gladdened, although sometimes also worried, by this fact. But once the co-ordination is a going concern, new men come readily into it and assume its existence without question.
So far as explicit organization — conspiratorial or not — is concerned, the power elite, by its very nature, is more likely to use existing organizations, working within and between them, than to set up explicit organizations whose membership is strictly limited to its own members. But if there is no machinery in existence to ensure, for example, that military and political factors will be balanced in decisions made, they will invent such machinery and use it, as with the National Security Council. Moreover, in a formally democratic polity, the aims and the powers of the various elements of this elite are further supported by an aspect of the permanent war economy: the assumption that the security of the nation supposedly rests upon great secrecy of plan and intent Many higher events that would reveal the working of the power elite can be withheld from public knowledge under the guise of secrecy. With the wide secrecy covering their operation’s and decisions, the power elite can mask their intentions, operations, and further consolidation. Any secrecy that is imposed upon those in positions to observe high decision-makers clearly works for and not against the operations of the power elite.
There is accordingly reason to suspect — but by the nature of the case, no proof — that the power elite is not altogether ‘surfaced.’ There is nothing hidden about it, although its activities are not publicized. As an elite, it is not organized, although its members often know one another, seem quite naturally to work together, and share many organizations in common There is nothing conspiratorial about it, although its decisions are often publicly unknown and its mode of operation manipulative rather than explicit.
It is not that the elite ‘believe in’ a compact elite behind the scenes and a mass down below. It is not put in that language, It is just that the people are of necessity confused and must, like trusting children, place all the new world of foreign policy and strategy and executive action in the hands of experts. It is just that everyone knows somebody has got to run the show, and that somebody usually does. Others do not really care anyway, and besides, they do not know how. So the gap between the two types gets wider.
When crises are defined as total, and as seemingly permanent, the consequences of decision become total, and the decisions m each major area of life come to be integrated and total. Up to a point, these consequences for other institutional orders can be assessed; beyond such points, chances have to be taken. It is then that, the felt scarcity of trained and imaginative judgment leads to plaintive feelings among executives about the shortage of qualified successors in political, military, and economic life. This feeling, in turn, leads to an increasing concern with the training of successors who could take over as older men of power retire.[17] In each area, there slowly arises a new generation which has grown up in an age of co-ordinated decisions.
In each of the elite circles, we have noticed this concern to recruit and to train successors as ‘broad-gauge’ men, that is, as men capable of making decisions that involve institutional areas other than their own. The chief executives have set up formal recruitment and training programs to man the corporate world as virtually a state within a state. Recruitment and training for the military elite has long been rigidly professionalized, but has now come to include educational routines of a sort which the remnants of older generals and admirals consider quite nonsensical.
Only the political order, with its absence of a genuine civil service, has lagged behind, creating an administrative vacuum into which military bureaucrats and corporate outsiders have been drawn. But even in this domain, since World War II, there have been repeated attempts, by elite men of such vision as the late James Forrestal’s, to inaugurate a career service that would include periods in the corporate world as well as in the governmental.[18]
What is lacking is a truly common elite program of recruitment and training; for the prep school, Ivy League College, and law school sequence of the metropolitan 400 is not up to the demands now made upon members of the power elite.[19] Britishers, such as Field Marshall Viscount Montgomery, well aware of this lack, recently urged the adoption of a system ‘under which a minority of high-caliber young students could be separated from the mediocre and given the best education possible to supply the country with leadership.’ His proposal is echoed, in various forms, by many who accept his criticism of ‘the American theory of public education on the ground that it is ill-suited to produce the “elite” group of leaders … this country needs to fulfill its obligations of world leadership.’ [20]
In part these demands reflect the unstated need to transcend recruitment on the sole basis of economic success, especially since it is suspect as often involving the higher immorality; in part it reflects the stated need to have men who, as Viscount Montgomery says, know ‘the meaning of discipline.’ But above all these demands reflect the at least vague consciousness on the part of the power elite themselves that the age of co-ordinated decisions, entailing a newly enormous range of consequences, requires a power elite that is of a new caliber. In so far as the sweep of matters which go into the making of decisions is vast and interrelated, the information needed for judgments complex and requiring particularized knowledge,[21] the men in charge will not only call upon one another; they will try to train their successors for the work at, hand. These new men will grow up as men of power within the co-ordination of economic and political and military decision.

7

The idea of the power elite rests upon and enables us to make sense of (1) the decisive institutional trends that characterize the structure of our epoch, in particular, the military ascendancy in a, privately incorporated economy, and more broadly, the several coincidences of objective interests between economic, military, and political institutions; (2) the social similarities and the psychological affinities of the men who occupy the command posts of these structures, in particular the increased interchangeability of the top positions in each of them and the increased traffic between these orders in the careers of men of power; (3) the ramifications, to the point of virtual totality, of the kind of decisions that are made at the top, and the rise to power of a set of men who, by training and bent, are professional organizers of considerable force and who are unrestrained by democratic party training.

Negatively, the formation of the power elite rests upon (1) the relegation of the professional party politician to the middle levels of power, (2) the semi-organized stalemate of the interests of sovereign localities into which the legislative function has fallen, (3) the virtually complete absence of a civil service that constitutes a politically neutral, but politically relevant, depository of brainpower and executive skill, and (4) the increased official secrecy behind which great decisions are made without benefit of public or even Congressional debate.
As a result, the political directorate, the corporate rich, and the ascendant military have come together as the power elite, and the expanded and centralized hierarchies which they head have encroached upon the old balances and have now relegated them to the middle levels of power. Now the balancing society is a conception that pertains accurately to the middle levels, and on that level the balance has become more often an affair of intrenched provincial and nationally irresponsible forces and demands than a center of power and national decision.
But how about the bottom? As all these trends have become visible at the top and on the middle, what has been happening to the great American public? If the top is unprecedentedly powerful and increasingly unified land willful; if the middle zones are increasingly a semi-organized stalemate — in what shape is the bottom, in what condition is the public at large? The rise of the power elite, we shall now see, rests upon, and in some ways is part of, the transformation of the publics of America into a mass society.


In a public, as we may understand the term, (1) virtually as many people express opinions as receive them, (2) Public communications are so organised that there is a chance immediately and effectively to answer back any opinion expressed in public. Opinion formed by such discussion (3) readily finds an outlet in effective action, even against – if necessary – the prevailing system of authority. And (4) authoritative institutions do not penetrate the public, which is thus more or less autonomous in its operations.
In a mass, (1) far fewer people express opinions than receive them; for the community of publics becomes an abstract collection of individuals who receive impressions from the mass media. (2) The communications that prevail are so organised that it is difficult or impossible for the individual to answer back immediately or with any effect. (3) The realisation of opinion in action is controlled by authorities who organise and control the channels of such action. (4) The mass has no autonomy from institutions; on the contrary, agents of authorised institutions penetrate this mass, reducing any autonomy it may have in the formation of opinion by discussion.


Karen Hudes

Published on Aug 30, 2013Karen shows her strength, fighting the good fight.Published on Sep 8, 2013 Senior Counsel for the World Bank legal department reports corruption to US Congress, the World Bank’s other member countries, and the pub…

Published on Aug 30, 2013

Karen shows her strength, fighting the good fight.

Published on Sep 8, 2013
Senior Counsel for the World Bank legal department reports corruption to US Congress, the World Bank’s other member countries, and the public.
https://twitter.com/KarenHudes
Karen Hudes studied law at Yale Law School and economics at the University of Amsterdam. She worked in the US Export Import Bank from 1980-1985 and in the Legal Department of the World Bank from 1986-2007. She established the Non Governmental Organization Committee of the International Law Section of the American Bar Association and the Committee on Multilateralism and the Accountability of International Organizations of the American Branch of the International Law Association. What did Karen Hudes blow the whistle on? In 2007 Karen warned the US Treasury Department and US Congress that the US would lose its right to appoint the President of the World Bank if the current American President of the World Bank did not play by the rules. http://kahudes.net/

Published on Oct 8, 2013

The US government shutdown – a temporary ailment or a symptom of a grave disease? Are the Republicans right in their move to block Obamacare spending? Who gains from the shutdown turmoil? Do the politicians care about their citizens? Our guest comes from the very heart of the banking system: Karen Hudes was World Bank lawyer when she blew the whistle on major corruption cases in the system and was fired as a result.

For FULL TRANSCRIPT of the interview click here: http://on.rt.com/ue0xat

war in Afghanistan

KABUL | Sun Oct 13, 2013 6:38am EDT

(Reuters) – An Afghan man wearing an Afghan army uniform shot at U.S. soldiers in eastern Afghanistan, killing at least one serviceman on Sunday, local officials and the NATO-led coalition said.

The so-called “insider attack” in Paktika province is the fourth in less than a month and is likely to strain already tense ties between coalition troops and their allies, with most foreign troops scheduled to withdraw by the end of next year.

A Reuters tally shows Sunday’s incident was the tenth this year, and took the death toll of foreign personnel to 15.

“A man wearing an Afghan army uniform shot at Americans in Sharana city (the provincial capital) near the governor’s office,” said an Afghan official, adding that two soldiers had been hit by the gunfire.

The NATO-led coalition confirmed one soldier had been shot by a man in security forces uniform, but did not comment on his nationality or whether the Afghan was wearing a army uniform.

Insider attacks threaten to further undermine waning support for the war among Western nations sending troops to Afghanistan.


KABUL, Afghanistan (AP) — U.S. Secretary of State John Kerry extended talks Saturday with President Hamid Karzai on a bilateral security agreement with the United States, and while work remains to be done a deal could be struck by the end of the day, a presidential spokesman said.

Aimal Faizi said some contentious issues remain to be finalized. Talks that began a year ago have been deadlocked over sovereignty issues and the safety of Afghan citizens at the hands of American and allied troops.

“There is still some work to do on the document. Things are not yet finalized. It will be concluded hopefully this evening. Although it is not certain,” Faizi said.

U.S. officials said it was hoped that the talks will reach an agreement in principle whose details can be finalized later.

“Secretary Kerry sees an opening to continue making headway on issues including security and sovereignty this evening and wants to leave Kabul with as many issues resolved as possible to set up conditions for finalizing an agreement,” said one U.S. official, who was not authorized to discuss the negotiations so spoke on condition of anonymity.

Kerry told U.S. Embassy staff after the meetings recessed that “we’ve had a terrific day.”

“We’re going back to the palace to enjoy dinner with the president and more importantly we’re going to see if we can make a little more progress, which is what we have been trying to do all day long,” he added.

“If this thing can come together, this will put the Taliban on their heels,” he added. “This will send a message to the community of nations that Afghanistan’s future is being defined in a way that is achievable.”

Kerry began negotiations with Karzai in the morning, the second day of talks after he arrived late Friday. The U.S. wants a deal by the end of the month, while Karzai wants assurances over sovereignty that have deadlocked negotiations in the past year.

Kerry is no stranger to marathon negotiations with Karzai.

In October 2009, when Kerry was chairman of the Senate Foreign Relations Committee and on a visit to Afghanistan, he managed to broker an agreement for Karzai to accept a runoff presidential election after a U.N. election commission threw out one third of his votes claiming massive fraud. Kerry spent four days convincing Karzai to accept the runoff, which was later cancelled when the runner up quit the race. Karzai was re-elected for a second and final presidential term.

Kerry’s unannounced overnight visit to Kabul comes as talks foundered. Discussions have repeatedly stalled in recent weeks over Karzai’s demand for American guarantees against future foreign intervention from countries like Pakistan, and U.S. demands for any post-2014 residual force to be able to conduct counterterrorism and counterinsurgency operations.

The situation deteriorated in the past week following a series of angry comments from Karzai that the United States and NATO were repeatedly violating Afghanistan’s sovereignty and inflicting suffering on its people.

Another possible reason for the outburst could have been the capture in eastern Afghanistan of senior Pakistani Taliban commander Latif Mehsud by U.S. forces on Oct. 5, the same day Kerry and Karzai last spoke. Karzai saw the move as an infringement on Afghan sovereignty.

State Department spokeswoman Marie Harf said Meshud’s group had claimed responsibility for the 2010 bombing attempt in Times Square and said they would carry out future attacks.

Mehsud is a senior deputy to Pakistani Taliban leader Hakimullah Mehsud. The Pakistani Taliban has waged a decade-long insurgency against Islamabad from sanctuaries along the Afghan border and also helped the Afghan Taliban in their war against U.S.-led troops in Afghanistan.

Karzai wants America to guarantee such cross-border militant activity won’t occur and has demanded guarantees the U.S. will defend Afghanistan against foreign intervention, an allusion to neighboring Pakistan. Afghanistan accuses its neighbor of harboring the Taliban and other extremists who enter Afghanistan and then cross back into Pakistan where they cannot be attacked by Afghan or U.S.-led international forces.

In one such attack Saturday, insurgents killed one civilian and two police officers in a suicide car bombing in the eastern city of Jalalabad.

The agreement is necessary to give the U.S. a legal basis for having forces in Afghanistan after the end of 2014 and also allow it to lease bases around the country. It would be an executive agreement, meaning the U.S. Senate would not have to ratify it.

There currently are an estimated 87,000 international troops in Afghanistan, including about 52,000 Americans. That number will be halved by February and all foreign combat troops will be gone by the end of next year.

The U.S. wants to keep as many as 10,000 troops in the country to go after the remnants of al-Qaida, but if no agreement is signed, all U.S. troops would have to leave by Dec. 31, 2014. President Barack Obama said in an interview with The Associated Press he would be comfortable with a full pullout of U.S. troops.

Karzai is calling a meeting of Afghan tribal elders in November to advise him on whether to sign a security deal.

If they endorse the agreement, then Karzai has political cover to agree to it. He is keenly aware that previous leaders of his country historically have been punished for selling out to foreign interests and wants to make sure that any U.S.-Afghan agreement is not seen in that light.


SUROBI, Afghanistan — Col. Babagul Aamal is a proud veteran of 28 years in the Afghan National Army. Short and fit, with a thick black beard, he’s a leader who blurts out exactly what he’s thinking.

“I don’t talk politics — I talk facts,” Aamal said, wearing a sweater beneath his uniform in his unheated command office on a dusty base 40 miles east of Kabul.

It shames him, Aamal said, that he is not allowed to wear his pistol when he enters the fortified gate of the new American military base next door. Though he’s a brigade commander, he’s required to stand before an airport-type scanner with his arms raised, almost in surrender.

Yet when Americans visit Aamal’s base, they are not searched. They are offered chai tea. And they bring half a dozen soldiers armed with M-16s, so-called Guardian Angels on the lookout for “insider attacks” by Afghan soldiers.

“Afghan generals get searched by low-ranking foreign soldiers,” Aamal said. “Our soldiers see this, and they feel insulted.”

As American troops shift from combat to advising, the ominous specter of insider attacks has strained the relationship between the two armies.

Sixty-two Western coalition troops have been killed this year in 46 such attacks, leaving many American soldiers deeply suspicious of their erstwhile allies.

At the same time, some Afghan officers and soldiers say they feel abandoned and patronized. After 11 years, they say, certain Americans still don’t respect Afghan customs.

Moreover, they complain that the United States is pulling out without providing the weapons and equipment needed to hold off the Taliban.

“The Americans have the weapons, so they go wherever they want. It’s like this is their country,” the brigade’s public affairs officer, Maj. Ghulam Ali, said with a weary shrug.

***

Officers and soldiers encountered during three days spent with the Afghan army were upbeat and enthusiastic about taking over the fight. But many also said they felt slighted by what they perceive as a chronic lack of resources.

At a desolate battalion base beneath towering snowcapped mountains, Lt. Col. Hussian Hadl sat in his office, shivering in an overcoat and puffing on a cigarette. The electricity was on, but only because Hadl was using precious fuel to run a generator for a visit by an American journalist.

Hadl’s 1st Battalion recently took over the base from a French military unit, which had fuel for generators. Hadl said he’s been supplied enough fuel to power communications equipment, but not for heat or lights.


US troops are set to leave Afghanistan in 2014, but an unidentified number will stay behind. This is an open-ended occupation that, combined with a pernicious drug war, constitutes a clear and present danger to Afghan, regional and global security.

– The Senate voted overwhelmingly to voice its support for an accelerated withdrawal from Afghanistan. The 62-33 vote included 13 Republicans. “It is time to end this war, end the longest war in United States history,” the measure’s chief sponsor Sen. Jeff Merkley (D-OR) said.

– Defense Secretary Leon Panetta said on Thursday that the United States and its allies are likely to battle al Qaeda for years to come. “Although we clearly have had an impact on (al Qaeda’s) presence in Afghanistan, the fact is that they continue to show up,” Panetta told reporters at the Pentagon. “And intelligence continues to indicate that they are looking for some kind of capability to be able to go into Afghanistan as well.”


ReutersBy Arshad Mohammed and Kiyoshi Takenaka

TOKYO (Reuters) – Major donors pledged on Sunday to give Afghanistan $16 billion in development aid through 2015 as they try to prevent it from sliding back into chaos when foreign troops leave, but demanded reforms to fight widespread corruption.

Donor fatigue and war weariness have taken their toll on how long the global community is willing to support Afghanistan and there are concerns about security following the withdrawal of most NATO troops in 2014 if financial backing is not secured.

“Afghanistan’s security cannot only be measured by the absence of war,” U.S. Secretary of State Hillary Clinton told an international donors’ conference in Tokyo.

“It has to be measured by whether people have jobs and economic opportunity, whether they believe their government is serving their needs, whether political reconciliation proceeds and succeeds.”

The roughly $4 billion in annual aid pledged at the meeting, attended by 80 countries and international organizations, fell short of the $6 billion a year the Afghan central bank has said will be needed to foster economic growth over the next decade.

Clinton and other donors stressed the importance of Afghanistan – one of the most corrupt nations in the world – taking aggressive action to fight graft and promote reforms.

“We have agreed that we need a different kind of long-term economic partnership, one built on Afghan progress in meeting its goals, in fighting corruption, in carrying out reform, and providing good governance,” Clinton said.

According to “mutual accountability” provisions in the final conference documents, as much as 20 percent of the aid could ultimately depend on Afghanistan meeting benchmarks on fighting corruption and other good governance measures.

However, a Japanese official said that it was up to each donor whether to make its aid contingent on such reforms and that the benchmarks could vary from country to country.

World Bank Managing Director Sri Mulyani Indrawati said the pressure was on the Afghan government to deliver reforms and ensure fair elections in 2014 in order to secure aid beyond the amount pledged in Tokyo.

“This is a fragile conflict state,” Indrawati told Reuters in an interview. “Three years is a very short time for a country to be able to build stable and competent institutions.”

NEED TO DO MORE

International donors provided $35 billion in aid to Afghanistan between 2001 and 2010, but the return on that investment has been mixed and the country remains one of the five poorest in the world.
President Hamid Karzai admits his government needs to do more to tackle corruption, but his critics say he is not doing enough, and some directly blame authorities for vast amounts of aid not reaching the right people.

While strides have been made in schooling children and improving access to health care, three-quarters of the 30 million Afghans are illiterate and the average person earns only about $530 a year, according to the World Bank.

The government has identified priority areas for economic development, including investment in agriculture and mining, which Western officials see as a possible engine for growth. Afghanistan is believed to have up to a trillion dollars’ worth of untapped mineral wealth.

Afghan Finance Minister Omar Zakhilwal said the Tokyo conference had shown aid donors were committed to the long haul. “Today’s event sends the strongest message to Afghan people that the international community will be with us in 2014, 2015, 2017, 2020 and beyond,” Zakhilwal told a news conference.
U.S. officials gave no figure for their aid pledge but said the administration would ask Congress to keep assistance through 2017 “at or near” what it has given over the past decade.

Annual U.S. aid to Afghanistan has ranged from about $1 billion a decade ago to a peak of about $4 billion in 2010. It stands at about $2.3 billion this year.

Japan pledged $3 billion in aid for Afghanistan through 2016. Foreign Minister Koichiro Gemba said $2.2 billion of that amount would be grants for development projects in areas like investment in roads and infrastructure.

The EU has said it will continue with pledges of 1.2 billion euros a year, but warned that if progress is not made with rule of law and women’s rights, this could be difficult to continue.

The pledges made in Tokyo are on top of the $4.1 billion by NATO and its partners for supporting the Afghan security forces.

(Additional reporting by Amie Ferris-Rotman in Kabul and Stanley White in Tokyo; Editing by Jeremy Laurence)

US negotiators who have been trying to reach a deal with Pakistan over a supply route to Nato troops in Afghanistan have quit the talks.

“The decision was reached to bring the team home for a short period of time,” Pentagon spokesman George Little said.

The negotiators have, so far, failed to reach a deal.

Pakistan shut a Nato supply route in November after a Nato air strike near the Afghan-Pakistani border which killed 24 Pakistani soldiers.

Part of the team left Islamabad over the weekend, and the rest will return shortly, Mr Little said.

The closure of the route left thousands of tankers bound for Afghanistan stranded in Pakistan.

Washington has stopped short of an official apology for the deaths of the Pakistani soldiers.

Tension between the two countries has been rising in recent months, with US Defence Secretary Leon Panetta warning last week that the US was “reaching the limits of our patience” with Pakistan.

US officials accuse Pakistan of providing safe haven to militants active in Afghanistan, which Islamabad denies.


During the first day of the NATO Summit in Chicago, Mr. Clumpner returned his medals along with 43 other veterans.


PESHAWAR, Pakistan (AP) — An American drone fired two missiles at a bakery in northwest Pakistan Saturday and killed four suspected militants, officials said, as the U.S. pushed on with its drone campaign despite Pakistani demands to stop. This was the third such strike in the country in less than a week.

Drone attacks in Pakistani tribal areas where Afghan and other militants have found refuge are considered a key tactic by U.S. officials in the war against al-Qaida and its Taliban supporters. But many Pakistanis resent the strikes, which they consider an affront to their sovereignty.

Two Pakistani intelligence officials said the latest attack took place in Miran Shah, the main town in the North Waziristan tribal region.

The officials said the victims were buying goods from a bakery when the missiles hit. Residents were still removing the debris, officials said. All of the dead were foreigners, but the officials did not have any information on their identities or nationalities.

The officials spoke on condition of anonymity because they were not authorized to talk to the media. The U.S. rarely talks publicly about the covert CIA-run drone program in Pakistan.

Drone strikes have become an increasingly contentious issue between Washington and Pakistan. Pakistan’s parliament has demanded the U.S. end all attacks on its territory.

Some figures within the Pakistani government and military are widely believed to have supported the attacks in the past. Washington-Islamabad security cooperation has declined as relations between the two countries have deteriorated, but many analysts believe there is still some support for the attacks on militants within Pakistan’s senior ranks.

U.S. officials have said in private that the strikes are a vital anti-terror tool and have killed many senior al-Qaida and Taliban commanders.

On Thursday, a suspected U.S. drone killed 10 alleged militants in northwest Pakistan near the Afghan border.

The attack took place in a militant hideout in the North Waziristan tribal area. Most of those killed were believed to be Uzbek insurgents.

On Wednesday four suspected militants were killed in the village of Datta Khel Kalai in North Waziristan.

The ongoing strikes have complicated negotiations between Islamabad and Washington about reopening supply routes for NATO troops in Afghanistan.

Pakistan closed the routes six months ago in retaliation for U.S. airstrikes that killed 24 Pakistani soldiers along the Afghan border. The Americans say the attacks were an accident.


For years, U.S. government agencies have told the public, veterans and Congress that they couldn’t draw any connections between the so-called “burn pits” disposing of trash at the military’s biggest bases and veterans’ respiratory or cardiopulmonary problems. But a 2011 Army memo obtained by Danger Room flat-out stated that the burn pit at one of Afghanistan’s largest bases poses “long-term adverse health conditions” to troops breathing the air there.

The unclassified memo (.jpg), dated April 15, 2011, stated that high concentrations of dust and burned waste present at Bagram Airfield for most of the war are likely to impact veterans’ health for the rest of their lives. “The long term health risk” from breathing in Bagram’s particulate-rich air include “reduced lung function or exacerbated chronic bronchitis, chronic obstructive pulmonary disease (COPD), asthma, atherosclerosis, or other cardiopulmonary diseases.” Service members may not necessarily “acquire adverse long term pulmonary or heart conditions,” but “the risk for such is increased.”

The cause of the health hazards are given the anodyne names Particulate Matter 10 and Particulate Matter 2.5, a reference to the size in micrometers of the particles’ diameter. Service personnel deployed to Bagram know them by more colloquial names: dust, trash and even feces — all of which are incinerated in “a burn pit” on the base, the memo says, as has been standard practice in Iraq and Afghanistan for a decade.

Accordingly, the health risks were not limited to troops serving at Bagram in 2011, the memo states. The health hazards are an assessment of “air samples taken over approximately the last eight years” at the base.

The memo’s findings contradict years of U.S. military assurances that the burn pits are no big deal. An Army memo from 2008 about the burn pit at Iraq’s giant Balad air base, titled, “Just The Facts,” found “no significant short- or long-term health risks and no elevated cancer risks are likely among personnel” (.pdf). A 2004 fact sheet from the Pentagon’s deployment health library — and still available on its website — informed troops that the high particulate matter in the air at Bagram “should not cause any long-term health effects.” More recently, in October 2010, a Pentagon epidemiological study found “for nearly all health outcomes measured, the incidence for those health outcomes studied among personnel assigned to locations with documented burn pits and who had returned from deployment, was either lower than, or about the same as, those who had never deployed” (.pdf).

Over the years, thousands of Iraq and Afghanistan veterans have experienced respiratory and cardiopulmonary problems that they associate with their service. Some have sued military contractors for exposing them to unsafe conditions. For months, Rep. Todd Akin (R-Mo.) has urged the military to create a database of vets suffering neurological or respiratory afflictions, a move that’s winding through the legislative process. But the military has argued it doesn’t have sufficient evidence to associate environmental conditions on the battlefield with long-term health risks — and it argued that months after this memo is dated.

“As recently as April, in correspondence with the Defense Department and in discussions with my staff, the Departments of Defense and Veterans Affairs both continued to maintain that research has not shown any long-term health consequences due to burn pits,” Akin tells Danger Room. “They also maintained that remaining burn pits in Afghanistan were away from military populations to reduce exposure. It is disturbing to discover that at least at Bagram the military concluded that burn pits posed a serious health risk.”

The Iraq and Afghanistan Veterans of America (IAVA) has collected “hundreds” of anecdotes from vets complaining of health problems connected to serving near burn pits. “It’s good to see someone in the military is acknowledging there are going to be long-term problems with burn pits, but it’s disturbing that this memo is more than a year old and it doesn’t seem like the military has done anything about it,” says Tom Tarantino, IAVA’s deputy policy director, who deployed to Iraq in 2005 as an Army captain. “I lived next to a burn pit for six months at Abu Ghraib. You can’t tell me that was OK. That was pretty nasty. While I was there everyone was hacking up weird shit.”

Any visitor to the sprawling Bagram airfield knows the burn pit — if not by sight, then by smell. It’s an acrid, smoldering barbecue of trash, from busted furniture to human waste, usually manned by Afghan employees who cover their noses and mouths with medical breathing masks. Plumes of aerosolized refuse emerge from what troops refer to as “The Shit Pit,” mingle with Parwan Province’s already dust-heavy air, and sweep over the base. In February, that was where soldiers at the nearby Parwan detention facility accidentally incinerated the Koran.

At the time of the memo’s issuance, it noted that the affected population on the base contemporaneously was “40,000 Service Members and contractors.” Hundreds of thousands have cycled through the giant base since the U.S. seized it in 2001. Bagram is a major transit and logistics hub for the Afghanistan war, and one of the first bases the U.S. took and continuously operated during the war. Millions more have served in Iraq and Afghanistan near similar burn pits.

According to the Environmental Protection Agency, studies conducted on the effects of breathing in Particulate Matter 10 and 2.5 have determined “a significant association between exposure to fine particles and premature mortality.” The Army memo reports that Bagram’s air had twice the amount of Particulate Matter 10 than the federal National Ambient Air Quality Standard, and more than three times the amount of Particulate Matter 2.5 as the standard.

Burn pits remain in use across Afghanistan. And although a study by the Institute of Medicine and sponsored by the Department of Veterans Affairs found last October that there is insufficient data to correlate those pits with health risks, troops’ cardiovascular problems are clearly on the rise: There were 91,013 cases reported in 2010, up sharply from 65,520 in 2001. A 2010 study found half of a small sample of soldiers who struggled to run two miles had undiagnosed bronchiolitis. Hundreds of troops have sued the pits’ contractor operators after experiencing chest pains, asthma and migraines. For years, the U.S. government has pled ignorance about the causes of those veterans’ ailments. And unless the military formally acknowledges that the burn pits pose a long-term health risk, it will be difficult for veterans to receive long-term health care for associated respiratory and cardiopulminary ailments from the Department of Veterans Affairs.

“The acknowledgement that air-sampling data is now indicating that burn pits may pose a risk of chronic illness to our servicemen and women validates the need for the national burn pit registry that I have proposed,” Akin says. Tarantino backs him up: “We don’t want another Agent Orange scenario, where it takes 40 years for the military to admit the stuff was bad and then has to spend all this effort tracking down affected servicemembers.”

The U.S. Army and the NATO military command in charge of the Afghanistan war did not immediately respond to requests for comment.

Even casual visitors to Bagram know that the air is a menace. Within days of my most recent reporting trip there, in August 2010, I developed a disgusting, productive cough that kept me from sleeping comfortably. Airmen and soldiers joked with me about catching “Bagram Lung.”

But for at least a year, the U.S. military has known that “Bagram Lung” won’t stay at Bagram. There’s a significant chance that it will plague a generation of Afghanistan veterans for the rest of their lives.


WASHINGTON (Reuters) – The United States will require “significant firepower” in Afghanistan in 2013-14, the commander of U.S. and NATO forces there said, but decisions about further U.S. troop reductions will only be made after this fall at the earliest.
“We’re going to need combat power. I don’t think anyone questions that,” Marine General John Allen said on Wednesday. “I owe the president some real analysis on this.”
Allen spoke to reporters two days after NATO leaders discussed Afghanistan’s future in Chicago, embracing a plan to hand control to local security forces by the middle of 2013 and, Western leaders hope, to end the long, costly Afghan conflict.
By the end of this summer, Allen is due to withdraw all the 33,000 “surge” troops that President Barack Obama sent to battle the Taliban in 2009-2010.
Once those troops are gone, Allen will assess the campaign and make recommendations to the White House about how best to withdraw most of the remaining U.S. force of about 68,000.
“I intend to take a very hard look at the state of the insurgency,” Allen said, and how Afghanistan’s growing military is faring. Those factors will inform his recommendations to Obama about how many troops can be pulled in 2013 and 2014 without allowing the Taliban to stage a comeback.

“So there’s not a number right now,” he said.

While most foreign troops will be gone from Afghanistan by the end of 2014, a modest number of Western soldiers are expected to stay beyond then, focused on targeted strikes against militants and advising Afghan forces.

Yet critics, especially among Republicans as the race to November presidential elections intensifies, are already warning the Obama administration against allowing anything other than conditions on the ground and security concerns to dictate the pace of the U.S. withdrawal from Afghanistan.
While Obama’s surge drove Taliban militants out of some areas of their southern stronghold, the Afghan insurgency remains a potent enemy.
Allen appeared confident that troop reduction would not allow the Taliban to return as a more powerful fighting force.
“It is not our intention to cede the ground, ultimately, to the Taliban. And, in fact, it’s not even clear that the Taliban have the capacity to flow in” to areas that foreign troops depart, Allen said.
(Reporting by Missy Ryan and Phil Stewart; Editing by Anthony Boadle)


PROVIDENCE, R.I.—A Rhode Island National Guard member struck and killed by an armored vehicle in Afghanistan last week had moved an Afghan girl to safety shortly before the accident, military officials said.

The National Guard on Wednesday released details of the March 22 accident that killed 29-year-old Sgt. Dennis Weichel Jr. of Providence and called him a hero.

Officials say Weichel’s unit was in Laghman province when they encountered several Afghan children in the path of their convoy. They say Weichel saw a girl trying to retrieve an item under the armored vehicle and moved her to safety, then was struck.

“He would have done it for anybody,” said Staff Sgt. Ronald Corbett, who was a mentor to Weichel and who deployed with him to Iraq in 2005. “That was the way he was. He would give you the shirt off his back if you needed it.”

Weichel was posthumously awarded the Bronze Star and the NATO Service Medal Afghanistan Campaign Ribbon RI Star.

Visiting hours are set for 4 p.m. Sunday at Olson & Parent Funeral Home in Providence. He will be buried at the Rhode Island Veterans Cemetery in Exeter.

He is survived by three children, his fiancee and his parents.


Afghan President Hamid Karzai has accused the US of not fully co-operating with a probe into the massacre of 16 civilians by an American serviceman.

The accused soldier is on his way to the US where he is likely to face a military tribunal. US officials named him as Staff Sergeant Robert Bales.

Afghan MPs had demanded the soldier be tried in public in Afghanistan.

Mr Karzai earlier met relatives of the dead, who demanded justice.

This has been going on for too long. This is by all means the end of the rope here”

President Hamid Karzai

Men, women and children were shot and killed at close range as the soldier apparently went on a rampage in villages close to a Nato base in the remote Panjwai district of southern Kandahar province.

President Karzai told reporters that the chief of the official investigation into those killings had not received the co-operation expected from the US.

He also said the problem of civilian casualties at the hands of Nato forces had “gone on for too long”

“This form of activity, this behaviour cannot be tolerated. It’s past, past, past the time,” Mr Karzai told the BBC’s Lyse Doucet at the presidential palace in Kabul.

On Wednesday, Mr Karzai told the US that it must pull back its troops from village areas and allow Afghan security forces to take the lead, in an effort to reduce such civilian deaths.

The Taliban also called off peace talks in the wake of the killings although they made no mention of the massacre in their statement.
Relatives’ anguish

Earlier, the president had an emotional session with relatives of those who had been killed last Sunday. The assembled villagers berated him and urged him to seek justice.

Mr Karzai said their account was entirely different from what he called the “supposed US version” that only one American soldier was involved in the massacre.

In [one] family, in four rooms people were killed, children and women were killed and then they were all brought together in one room and then put on fire. That one man cannot do,” he said, reporting the concerns of the villagers.

The allegation that there was more than one gunman contradicts the official US version of events. But Mr Karzai assured villagers that he would pursue that line of inquiry.

“Why did this happen?” demanded the man who lost nine members of his family. “Do you have answers, Mr President?”

“No, I do not,” responded a tired-looking Mr Karzai.

Our correspondent, Lyse Doucet, says the president’s strong public condemnation of his most important ally is certain to frustrate the US. Washington has been trying to limit the damage from these latest incidents, she says, as they deal with an unpredictable president.

This intervention adds new strains to an already troubled partnership, our correspondent says.


By Amy Goodman with Denis Moynihan

We may never know what drove a U.S. Army staff sergeant to head out into the Afghan night and allegedly murder at least 16 civilians in their homes, among them nine children and three women. The massacre near Belambai, in Kandahar, Afghanistan, has shocked the world and intensified the calls for an end to the longest war in U.S. history. The attack has been called tragic, which it surely is. But when Afghans attack U.S. forces, they are called “terrorists.” That is, perhaps, the inconsistency at the core of U.S. policy, that democracy can be delivered through the barrel of a gun, that terrorism can be fought by terrorizing a nation.

“I did it,” the alleged mass murderer said as he returned to the forward operating base outside Kandahar, that southern city called the “heartland of the Taliban.” He is said to have left the base at 3 a.m. and walked to three nearby homes, methodically killing those inside. One farmer, Abdul Samad, was away at the time. His wife, four sons, and four daughters were killed. Some of the victims had been stabbed, some set on fire. Samad told The New York Times, “Our government told us to come back to the village, and then they let the Americans kill us.”

The massacre follows massive protests against the U.S. military’s burning of copies of the Quran, which followed the video showing U.S. Marines urinating on the corpses of Afghans. Two years earlier, the notorious “kill team” of U.S. soldiers that murdered Afghan civilians for sport, posing for gruesome photos with the corpses and cutting off fingers and other body parts as trophies, also was based near Kandahar.

In response, Defense Secretary Leon Panetta rolled out a string of cliches, reminding us that “war is hell.” Panetta visited Camp Leatherneck in Helmand province, near Kandahar, this week on a previously scheduled trip that coincidentally fell days after the massacre. The 200 Marines invited to hear him speak were forced to leave their weapons outside the tent. NBC News reported that such instructions were “highly unusual,” as Marines are said to always have weapons on hand in a war zone. Earlier, upon his arrival, a stolen truck raced across the landing strip toward his plane, and the driver leapt out of the cab, on fire, in an apparent attack.

The violence doesn’t just happen in the war zone. Back in the U.S., the wounds of war are manifesting in increasingly cruel ways.


LANSING, Kansas (Reuters) – U.S. authorities lack proof of what occurred the night a U.S. soldier is suspected of killing 16 villagers in Afghanistan, the lawyer representing the serviceman said on Tuesday.

“I’m very concerned now they don’t have much proof of anything,” attorney John Henry Browne told Reuters after meeting with U.S. Army Staff Sergeant Robert Bales on Tuesday for a second day in a military detention center in Kansas.

Browne said he has now spent 11 hours with Bales discussing the events of Sunday, March 11, when Bales allegedly walked off his base in southern Afghanistan and gunned down the 16 civilians, including nine children and three women, in a massacre that damaged U.S.-Afghan relations.

Bales, 38, a four-tour combat veteran, has not yet been charged, but Browne told reporters on Tuesday he expected his client to be charged with “homicide and a bunch of other charges” on Thursday. He added that the case could stretch over two years.

I don’t know what the evidence is,” Browne told reporters. “We’ve all heard the allegations. I don’t know that the government has proved much. There is no forensic evidence, there is no confession.”

Browne said Bales is still “in shock” and cast the soldier as a selfless servant of the U.S. armed forces. “He is a soldier’s soldier. He did not want to go over there but he did what he was told. He has never said anything about ‘poor little me’, which I get from my clients’ way too often. His first questions were about the safety and security of his family.”

He added that Bales may speak to his wife on the phone Tuesday night, for the first time since the incident. On Monday, Bales’ wife, Karilyn, appealed for peace and understanding.

Browne sought to downplay the effect of Bales’ financial problems, which include an abandoned property in the Seattle area and a $1.3 million fine from his time as a securities broker.

The Pentagon has previously said that Sgt Bales could face charges that carry a possible death penalty.

Such a trial could take years, contrasting with Afghan demands for swift and decisive justice.


By Qais Azimy in on Mon, 2012-03-19 14:23.

In the days following the rogue US soldier’s shooting spree in Kandahar, most of the media, us included, focused on the “backlash” and how it might further strain the relations with the US.

Many mainstream media outlets channeled a significant amount of energy into uncovering the slightest detail about the accused soldier – now identified as Staff Sergeant Robert Bales. We even know where his wife wanted to go for vacation, or what she said on her personal blog.

But the victims became a footnote, an anonymous footnote. Just the number 16. No one bothered to ask their ages, their hobbies, their aspirations. Worst of all, no one bothered to ask their names.

In honoring their memory, I write their names below, and the little we know about them: that nine of them were children, three were women.

The dead:

Mohamed Dawood son of Abdullah
Khudaydad son of Mohamed Juma
Nazar Mohamed
Payendo
Robeena
Shatarina daughter of Sultan Mohamed
Zahra daughter of Abdul Hamid
Nazia daughter of Dost Mohamed
Masooma daughter of Mohamed Wazir
Farida daughter of Mohamed Wazir
Palwasha daughter of Mohamed Wazir
Nabia daughter of Mohamed Wazir
Esmatullah daughter of Mohamed Wazir
Faizullah son of Mohamed Wazir
Essa Mohamed son of Mohamed Hussain
Akhtar Mohamed son of Murrad Ali

The wounded:
Haji Mohamed Naim son of Haji Sakhawat
Mohamed Sediq son of Mohamed Naim
Parween
Rafiullah
Zardana
Zulheja


KABUL (Reuters) – Defense Secretary Leon Panetta told troops in Afghanistan on Wednesday that the massacre of 16 Afghan civilians by an American soldier must not deter them from their mission to secure the country ahead of a 2014 NATO withdrawal deadline.

Despite calls from local residents for him to be tried in Afghanistan, the U.S. staff sergeant who killed the villagers on Sunday has been flown out of Afghanistan, the Pentagon said.

In Washington, President Barack Obama said after meeting with British Prime Minister David Cameron he did not anticipate any “sudden” change in U.S. plans for the pace of withdrawing troops from Afghanistan.
Panetta arrived amid heightened tensions over the massacre. At around the time he landed at a British airbase, an Afghan man drove a stolen pickup truck at high speed onto a runway and emerged from the vehicle in a blaze, the Pentagon said.

Pentagon spokesman George Little, travelling with Panetta, denied reports in Afghan media that the vehicle caught fire or exploded. No explosives were found on the man or in the truck.

“The Secretary, we believe, was never in danger,” Little said, adding that the driver’s motives were unclear and he was being treated for burns. A coalition member was injured when he was pulled from the vehicle as it was stolen, the Pentagon said.

In an earlier incident, a motorcycle bomb blast in Kandahar city killed an Afghan intelligence soldier and wounded two others, as well as a civilian.

A roadside bomb also killed eight civilians in southern Helmand province, where Panetta began a two-day visit by meeting with U.S. and coalition forces at two bases, Afghan provincial officials said.

“We’ll be challenged by our enemy. We’ll be challenged by ourselves. We’ll be challenged by the hell of war itself. But none of that, none of that, must ever deter us from the mission that we must achieve,” Panetta told soldiers at Camp Leatherneck, the main U.S. Marine base in the volatile area.

Panetta’s trip had been scheduled before Sunday’s shootings in two Kandahar villages, but gained added urgency as political pressure mounted on Afghan and U.S. officials over the unpopular war, now in its 11th year.

Obama called the shooting of 16 Afghans “tragic” at a news briefing with Cameron, but emphasized that both nations remained committed to completing the Afghan mission “responsibly.”

“There will be a robust coalition presence inside of Afghanistan during this fighting season to make sure that the Taliban understand that they’re not going to be able to regain momentum,” Obama said in the White House Rose Garden.

NATO leaders gathering in Obama’s home city of Chicago on May 20-21 will decide the “next phase” of the planned transition to Afghan forces taking the lead for security in 2014, he said.

The United States and Britain have the largest contingents of foreign troops in Afghanistan, but domestic support for the more than 10-year-old war has flagged, posing a challenge to Obama as he campaigns for reelection on November 6.

Obama acknowledged that people wanted the war over, but argued they still back the reason the United States invaded in the aftermath of the September 11, 2001 attacks on U.S. cities, plotted by al Qaeda militants from the sanctuary of Afghanistan.

MAJORITY WANT TROOPS HOME

In a Reuters/Ipsos poll, 40 percent of Americans said the shooting spree, in which nine children and three women were among those killed, had weakened their support for the war.

Sixty-one percent of Americans surveyed in the March 12-13 poll said remaining U.S. troops should be brought home immediately, down slightly from the 66 percent with that opinion in a similar March poll. Seventeen percent disagreed.

U.S. soldiers are the likely targets of any backlash over the killings. The Afghan Taliban threatened to retaliate by beheading U.S. personnel, while insurgents also attacked investigating Afghan officials on Tuesday.

Afghans investigating the incident had been shown video of the U.S. soldier taken from a security camera mounted on a blimp above his base, an Afghan security official who could not be identified told Reuters.
The footage showed the uniformed soldier, with his weapon covered by a cloth, approaching the gates of the Belandai special forces base and throwing his arms up in surrender, the official said.

The video had been shown to investigators to help dispel a widely held belief among Afghans, including many members of parliament, that more than one soldier must have been involved because of the high death toll, the official said.

Panetta was to hold talks with Afghan leaders, including President Hamid Karzai, with tensions high following a spate of incidents, including the burning of Korans at the main NATO base in the country last month.

DEMAND FOR AFGHAN TRIAL

While Afghan members of parliament have called for a trial of the soldier responsible for the massacre under Afghan law, Karzai’s office was understood to accept that a trial in a U.S. court would be acceptable, provided the process was transparent and open to media.

The Pentagon said the soldier, whose name has not been released, was flown out of Afghanistan. The commander of U.S. and Afghan forces in Afghanistan, General John Allen, made the decision based on a legal recommendation, a U.S. official said.

In the two Panjwai district villages where the massacre took place, U.S. troops remained confined to the compound where the soldier was based, and people in the area demanded a trial in Afghanistan under Afghan law.

“They have to be prosecuted here. They have done two crimes against my family. One, they killed them, and secondly, they burned them,” said Wazir Mohammad, 40, who lost 11 members of his family in the incident.
Panetta’s visit to Helmand – where U.S. Marines and British soldiers are battling a resilient insurgency – came a day after the first protests over Sunday’s massacre flared in the eastern city of Jalalabad.

Some 2,000 demonstrators chanted “Death to America” and demanded Karzai reject a planned strategic pact that would allow U.S. advisers and possibly special forces to remain beyond the pullout of most NATO combat troops by the end of 2014.

The U.S. military hopes to withdraw about 23,000 soldiers from Afghanistan by the end of the coming summer fighting season, leaving about 68,000.

With its mission facing increasing protests in Afghanistan, NATO said on Wednesday that it plans to boost security measures for its troops there, a decision that was based the January killing of four French soldiers by a rogue Afghan soldier.

“It’s a mix of measures concerning vetting, screening, but also training and education,” said Oana Lungescu, spokeswoman for the Western military alliance.

The plan would strengthen security measures for ISAF (the International Security Assistance Force in Afghanistan), as well as improve the vetting, screening and monitoring of Afghan forces and “crucially improve cultural awareness on both sides,” a NATO spokeswoman said in Brussels.

(Additional reporting by Ahmad Nadem in Kandahar, Mirwais Harooni in Kabul and David Alexander in Washington; Writing by Rob Taylor; Editing by Kevin Liffey and Anthony Boadle)


KABUL (Reuters) – Suspected insurgents opened fire on Tuesday on senior Afghan investigators of the massacre of 16 civilians by a lone U.S. soldier, Afghan officials said, just hours after the Taliban threatened to behead American troops to avenge the killings.

The gunmen shot from long range at two of President Hamid Karzai’s brothers, Shah Wali Karzai and Abdul Qayum Karzai, and security officials at the site of the massacre in Kandahar’s Panjwai district.

Karzai’s brothers were unharmed in the brief battle, which began during meetings with local people at a mosque near Najiban and Alekozai villages, but a soldier was killed and a civilian wounded. The area is a Taliban stronghold and a supply route.

The Taliban had earlier threatened reprisals for the weekend shooting spree, which came weeks after deadly riots across the country over the burning of copies of the Koran by U.S. troops at NATO’s main base in the country. That violence led to calls to accelerate a 2014 goal for the exit of most foreign combat troops.

“The Islamic Emirate once again warns the American animals that the mujahideen will avenge them, and with the help of Allah will kill and behead your sadistic murderous soldiers,” Taliban spokesman Zabihullah Mujahid said in a statement, using the term by which the Islamist group describes itself.

The grim warning, which was unlikely to have any impact on heavily-protected NATO soldiers on the ground, followed the February beheading of four Afghan men by insurgents in a country where such killings are relatively rare.

Tuesday’s attack, which was carried out despite tight security around Karzai’s siblings, Kandahar governor Tooryalai Wesa and Tribal Affairs Minister Asadullah Khalid, underscored the insurgents’ ability to strike at fledgling Afghan government forces.

The first protests over Sunday’s massacre also broke out in eastern city Jalalabad, where around 2,000 demonstrators chanted “Death to America” and demanded President Karzai reject a planned strategic pact with Washington that would allow U.S. advisers and possibly special forces to remain in Afghanistan beyond 2014.

An unnamed U.S. soldier — reported to have only recently arrived in the country — is accused of walking off his base in Kandahar province in the middle of the night and gunning down at least 16 villagers, mostly women and children.

A U.S. official said the accused soldier had suffered a traumatic brain injury while on a previous deployment in Iraq.

U.S. President Barack Obama, speaking after a phone call with Karzai — who is said to be furious over the latest deaths — said the shootings had only increased his determination to get American troops out of Afghanistan as planned.

However, Obama cautioned there should not be a “rush to the exits” for U.S. forces who have been fighting in Afghanistan since late 2001 and that the drawdown set for the end of 2014 should be done in a responsible way.

The soldier, from a conventional unit, was based at a joint U.S.-Afghan base used by elite U.S. troops under a so-called village support program hailed by NATO as a possible model for U.S. involvement in the country after the 2014 drawdown.

Such bases provide support to local Afghan security units and provide a source of security advice and training, as well as anti-insurgent backup and intelligence.

“CAN NO LONGER BE CALLED ROGUE”

A spokesman for the Kandahar governor Wesa said tribal elders in the area of the massacre would urge against protests and work to dampen public anger if the investigation process was transparent.

“They are supporting the government and will accept any conclusion by the investigators. Today we have meetings with people in the area and all will become clear,” spokesman Ahmad Jawid Faisal said.

NATO officials said it was too early to tell if the U.S. soldier would be tried in the United States or Afghanistan if investigators were to find enough evidence to charge him, but he would be under U.S. laws and procedures under an agreement between U.S. and Afghan officials.

Typically, once the initial investigation is completed, prosecutors decide if they have enough evidence to file charges and then could move to an Article 32 or court martial hearing.

NATO’s top commander in Afghanistan, Marine General John Allen, has promised a rapid investigation of the massacre, while security was being reviewed at NATO bases across the country.

U.S. Defense Secretary Leon Panetta said on Monday that the death penalty could be sought in the U.S. military justice system against the soldier, but portrayed the shooting as an isolated event that would not alter withdrawal plans.

While Afghan MPs in parliament called for a trial under Afghan law, Karzai’s office was understood to accept that a trial in a U.S. court would be acceptable provided the process was transparent and open to media.

Afghan MPs protested against the shooting for a second day in the capital Kabul by walking out of a session.

Analysts said the incident would complicate U.S. efforts to reach agreement with the Afghan government on a post-2014 security pact before a May summit in the U.S. city of Chicago on the future size and funding of Afghan security forces.

Thomas Ruttig of the Afghanistan Analysts Network said that despite NATO and White House references to the killings as the work of a “rogue” soldier, similar events had happened before, including a “kill team” apprehended in Kandahar in 2010.

“In the stress of an environment of escalated violence – by both sides, but particularly after Obama’s troop surge in early 2009, it looks as if most soldiers simply see Afghanistan as a whole as ‘enemy territory’ and every Afghan as a potential terrorist. This can no longer be called ‘rogue’,” Ruttig said.

(Additional reporting by Jack Kimball; Editing by Daniel Magnowski)


 PR: ?  I: ?

KABUL | Sun Oct 13, 2013 6:38am EDT

(Reuters) – An Afghan man wearing an Afghan army uniform shot at U.S. soldiers in eastern Afghanistan, killing at least one serviceman on Sunday, local officials and the NATO-led coalition said.

The so-called “insider attack” in Paktika province is the fourth in less than a month and is likely to strain already tense ties between coalition troops and their allies, with most foreign troops scheduled to withdraw by the end of next year.

A Reuters tally shows Sunday’s incident was the tenth this year, and took the death toll of foreign personnel to 15.

“A man wearing an Afghan army uniform shot at Americans in Sharana city (the provincial capital) near the governor’s office,” said an Afghan official, adding that two soldiers had been hit by the gunfire.

The NATO-led coalition confirmed one soldier had been shot by a man in security forces uniform, but did not comment on his nationality or whether the Afghan was wearing a army uniform.

Insider attacks threaten to further undermine waning support for the war among Western nations sending troops to Afghanistan.


KABUL, Afghanistan (AP) — U.S. Secretary of State John Kerry extended talks Saturday with President Hamid Karzai on a bilateral security agreement with the United States, and while work remains to be done a deal could be struck by the end of the day, a presidential spokesman said.

Aimal Faizi said some contentious issues remain to be finalized. Talks that began a year ago have been deadlocked over sovereignty issues and the safety of Afghan citizens at the hands of American and allied troops.

“There is still some work to do on the document. Things are not yet finalized. It will be concluded hopefully this evening. Although it is not certain,” Faizi said.

U.S. officials said it was hoped that the talks will reach an agreement in principle whose details can be finalized later.

“Secretary Kerry sees an opening to continue making headway on issues including security and sovereignty this evening and wants to leave Kabul with as many issues resolved as possible to set up conditions for finalizing an agreement,” said one U.S. official, who was not authorized to discuss the negotiations so spoke on condition of anonymity.

Kerry told U.S. Embassy staff after the meetings recessed that “we’ve had a terrific day.”

“We’re going back to the palace to enjoy dinner with the president and more importantly we’re going to see if we can make a little more progress, which is what we have been trying to do all day long,” he added.

“If this thing can come together, this will put the Taliban on their heels,” he added. “This will send a message to the community of nations that Afghanistan’s future is being defined in a way that is achievable.”

Kerry began negotiations with Karzai in the morning, the second day of talks after he arrived late Friday. The U.S. wants a deal by the end of the month, while Karzai wants assurances over sovereignty that have deadlocked negotiations in the past year.

Kerry is no stranger to marathon negotiations with Karzai.

In October 2009, when Kerry was chairman of the Senate Foreign Relations Committee and on a visit to Afghanistan, he managed to broker an agreement for Karzai to accept a runoff presidential election after a U.N. election commission threw out one third of his votes claiming massive fraud. Kerry spent four days convincing Karzai to accept the runoff, which was later cancelled when the runner up quit the race. Karzai was re-elected for a second and final presidential term.

Kerry’s unannounced overnight visit to Kabul comes as talks foundered. Discussions have repeatedly stalled in recent weeks over Karzai’s demand for American guarantees against future foreign intervention from countries like Pakistan, and U.S. demands for any post-2014 residual force to be able to conduct counterterrorism and counterinsurgency operations.

The situation deteriorated in the past week following a series of angry comments from Karzai that the United States and NATO were repeatedly violating Afghanistan’s sovereignty and inflicting suffering on its people.

Another possible reason for the outburst could have been the capture in eastern Afghanistan of senior Pakistani Taliban commander Latif Mehsud by U.S. forces on Oct. 5, the same day Kerry and Karzai last spoke. Karzai saw the move as an infringement on Afghan sovereignty.

State Department spokeswoman Marie Harf said Meshud’s group had claimed responsibility for the 2010 bombing attempt in Times Square and said they would carry out future attacks.

Mehsud is a senior deputy to Pakistani Taliban leader Hakimullah Mehsud. The Pakistani Taliban has waged a decade-long insurgency against Islamabad from sanctuaries along the Afghan border and also helped the Afghan Taliban in their war against U.S.-led troops in Afghanistan.

Karzai wants America to guarantee such cross-border militant activity won’t occur and has demanded guarantees the U.S. will defend Afghanistan against foreign intervention, an allusion to neighboring Pakistan. Afghanistan accuses its neighbor of harboring the Taliban and other extremists who enter Afghanistan and then cross back into Pakistan where they cannot be attacked by Afghan or U.S.-led international forces.

In one such attack Saturday, insurgents killed one civilian and two police officers in a suicide car bombing in the eastern city of Jalalabad.

The agreement is necessary to give the U.S. a legal basis for having forces in Afghanistan after the end of 2014 and also allow it to lease bases around the country. It would be an executive agreement, meaning the U.S. Senate would not have to ratify it.

There currently are an estimated 87,000 international troops in Afghanistan, including about 52,000 Americans. That number will be halved by February and all foreign combat troops will be gone by the end of next year.

The U.S. wants to keep as many as 10,000 troops in the country to go after the remnants of al-Qaida, but if no agreement is signed, all U.S. troops would have to leave by Dec. 31, 2014. President Barack Obama said in an interview with The Associated Press he would be comfortable with a full pullout of U.S. troops.

Karzai is calling a meeting of Afghan tribal elders in November to advise him on whether to sign a security deal.

If they endorse the agreement, then Karzai has political cover to agree to it. He is keenly aware that previous leaders of his country historically have been punished for selling out to foreign interests and wants to make sure that any U.S.-Afghan agreement is not seen in that light.


SUROBI, Afghanistan — Col. Babagul Aamal is a proud veteran of 28 years in the Afghan National Army. Short and fit, with a thick black beard, he’s a leader who blurts out exactly what he’s thinking.

“I don’t talk politics — I talk facts,” Aamal said, wearing a sweater beneath his uniform in his unheated command office on a dusty base 40 miles east of Kabul.

It shames him, Aamal said, that he is not allowed to wear his pistol when he enters the fortified gate of the new American military base next door. Though he’s a brigade commander, he’s required to stand before an airport-type scanner with his arms raised, almost in surrender.

Yet when Americans visit Aamal’s base, they are not searched. They are offered chai tea. And they bring half a dozen soldiers armed with M-16s, so-called Guardian Angels on the lookout for “insider attacks” by Afghan soldiers.

“Afghan generals get searched by low-ranking foreign soldiers,” Aamal said. “Our soldiers see this, and they feel insulted.”

As American troops shift from combat to advising, the ominous specter of insider attacks has strained the relationship between the two armies.

Sixty-two Western coalition troops have been killed this year in 46 such attacks, leaving many American soldiers deeply suspicious of their erstwhile allies.

At the same time, some Afghan officers and soldiers say they feel abandoned and patronized. After 11 years, they say, certain Americans still don’t respect Afghan customs.

Moreover, they complain that the United States is pulling out without providing the weapons and equipment needed to hold off the Taliban.

“The Americans have the weapons, so they go wherever they want. It’s like this is their country,” the brigade’s public affairs officer, Maj. Ghulam Ali, said with a weary shrug.

***

Officers and soldiers encountered during three days spent with the Afghan army were upbeat and enthusiastic about taking over the fight. But many also said they felt slighted by what they perceive as a chronic lack of resources.

At a desolate battalion base beneath towering snowcapped mountains, Lt. Col. Hussian Hadl sat in his office, shivering in an overcoat and puffing on a cigarette. The electricity was on, but only because Hadl was using precious fuel to run a generator for a visit by an American journalist.

Hadl’s 1st Battalion recently took over the base from a French military unit, which had fuel for generators. Hadl said he’s been supplied enough fuel to power communications equipment, but not for heat or lights.


US troops are set to leave Afghanistan in 2014, but an unidentified number will stay behind. This is an open-ended occupation that, combined with a pernicious drug war, constitutes a clear and present danger to Afghan, regional and global security.

– The Senate voted overwhelmingly to voice its support for an accelerated withdrawal from Afghanistan. The 62-33 vote included 13 Republicans. “It is time to end this war, end the longest war in United States history,” the measure’s chief sponsor Sen. Jeff Merkley (D-OR) said.

– Defense Secretary Leon Panetta said on Thursday that the United States and its allies are likely to battle al Qaeda for years to come. “Although we clearly have had an impact on (al Qaeda’s) presence in Afghanistan, the fact is that they continue to show up,” Panetta told reporters at the Pentagon. “And intelligence continues to indicate that they are looking for some kind of capability to be able to go into Afghanistan as well.”


TOKYO (Reuters) – Major donors pledged on Sunday to give Afghanistan $16 billion in development aid through 2015 as they try to prevent it from sliding back into chaos when foreign troops leave, but demanded reforms to fight widespread corruption.

Donor fatigue and war weariness have taken their toll on how long the global community is willing to support Afghanistan and there are concerns about security following the withdrawal of most NATO troops in 2014 if financial backing is not secured.

“Afghanistan’s security cannot only be measured by the absence of war,” U.S. Secretary of State Hillary Clinton told an international donors’ conference in Tokyo.

“It has to be measured by whether people have jobs and economic opportunity, whether they believe their government is serving their needs, whether political reconciliation proceeds and succeeds.”

The roughly $4 billion in annual aid pledged at the meeting, attended by 80 countries and international organizations, fell short of the $6 billion a year the Afghan central bank has said will be needed to foster economic growth over the next decade.

Clinton and other donors stressed the importance of Afghanistan – one of the most corrupt nations in the world – taking aggressive action to fight graft and promote reforms.

“We have agreed that we need a different kind of long-term economic partnership, one built on Afghan progress in meeting its goals, in fighting corruption, in carrying out reform, and providing good governance,” Clinton said.

According to “mutual accountability” provisions in the final conference documents, as much as 20 percent of the aid could ultimately depend on Afghanistan meeting benchmarks on fighting corruption and other good governance measures.

However, a Japanese official said that it was up to each donor whether to make its aid contingent on such reforms and that the benchmarks could vary from country to country.

World Bank Managing Director Sri Mulyani Indrawati said the pressure was on the Afghan government to deliver reforms and ensure fair elections in 2014 in order to secure aid beyond the amount pledged in Tokyo.

“This is a fragile conflict state,” Indrawati told Reuters in an interview. “Three years is a very short time for a country to be able to build stable and competent institutions.”

NEED TO DO MORE

International donors provided $35 billion in aid to Afghanistan between 2001 and 2010, but the return on that investment has been mixed and the country remains one of the five poorest in the world.
President Hamid Karzai admits his government needs to do more to tackle corruption, but his critics say he is not doing enough, and some directly blame authorities for vast amounts of aid not reaching the right people.

While strides have been made in schooling children and improving access to health care, three-quarters of the 30 million Afghans are illiterate and the average person earns only about $530 a year, according to the World Bank.

The government has identified priority areas for economic development, including investment in agriculture and mining, which Western officials see as a possible engine for growth. Afghanistan is believed to have up to a trillion dollars’ worth of untapped mineral wealth.

Afghan Finance Minister Omar Zakhilwal said the Tokyo conference had shown aid donors were committed to the long haul. “Today’s event sends the strongest message to Afghan people that the international community will be with us in 2014, 2015, 2017, 2020 and beyond,” Zakhilwal told a news conference.
U.S. officials gave no figure for their aid pledge but said the administration would ask Congress to keep assistance through 2017 “at or near” what it has given over the past decade.

Annual U.S. aid to Afghanistan has ranged from about $1 billion a decade ago to a peak of about $4 billion in 2010. It stands at about $2.3 billion this year.

Japan pledged $3 billion in aid for Afghanistan through 2016. Foreign Minister Koichiro Gemba said $2.2 billion of that amount would be grants for development projects in areas like investment in roads and infrastructure.

The EU has said it will continue with pledges of 1.2 billion euros a year, but warned that if progress is not made with rule of law and women’s rights, this could be difficult to continue.

The pledges made in Tokyo are on top of the $4.1 billion by NATO and its partners for supporting the Afghan security forces.

(Additional reporting by Amie Ferris-Rotman in Kabul and Stanley White in Tokyo; Editing by Jeremy Laurence)

US negotiators who have been trying to reach a deal with Pakistan over a supply route to Nato troops in Afghanistan have quit the talks.

“The decision was reached to bring the team home for a short period of time,” Pentagon spokesman George Little said.

The negotiators have, so far, failed to reach a deal.

Pakistan shut a Nato supply route in November after a Nato air strike near the Afghan-Pakistani border which killed 24 Pakistani soldiers.

Part of the team left Islamabad over the weekend, and the rest will return shortly, Mr Little said.

The closure of the route left thousands of tankers bound for Afghanistan stranded in Pakistan.

Washington has stopped short of an official apology for the deaths of the Pakistani soldiers.

Tension between the two countries has been rising in recent months, with US Defence Secretary Leon Panetta warning last week that the US was “reaching the limits of our patience” with Pakistan.

US officials accuse Pakistan of providing safe haven to militants active in Afghanistan, which Islamabad denies.


During the first day of the NATO Summit in Chicago, Mr. Clumpner returned his medals along with 43 other veterans.


PESHAWAR, Pakistan (AP) — An American drone fired two missiles at a bakery in northwest Pakistan Saturday and killed four suspected militants, officials said, as the U.S. pushed on with its drone campaign despite Pakistani demands to stop. This was the third such strike in the country in less than a week.

Drone attacks in Pakistani tribal areas where Afghan and other militants have found refuge are considered a key tactic by U.S. officials in the war against al-Qaida and its Taliban supporters. But many Pakistanis resent the strikes, which they consider an affront to their sovereignty.

Two Pakistani intelligence officials said the latest attack took place in Miran Shah, the main town in the North Waziristan tribal region.

The officials said the victims were buying goods from a bakery when the missiles hit. Residents were still removing the debris, officials said. All of the dead were foreigners, but the officials did not have any information on their identities or nationalities.

The officials spoke on condition of anonymity because they were not authorized to talk to the media. The U.S. rarely talks publicly about the covert CIA-run drone program in Pakistan.

Drone strikes have become an increasingly contentious issue between Washington and Pakistan. Pakistan’s parliament has demanded the U.S. end all attacks on its territory.

Some figures within the Pakistani government and military are widely believed to have supported the attacks in the past. Washington-Islamabad security cooperation has declined as relations between the two countries have deteriorated, but many analysts believe there is still some support for the attacks on militants within Pakistan’s senior ranks.

U.S. officials have said in private that the strikes are a vital anti-terror tool and have killed many senior al-Qaida and Taliban commanders.

On Thursday, a suspected U.S. drone killed 10 alleged militants in northwest Pakistan near the Afghan border.

The attack took place in a militant hideout in the North Waziristan tribal area. Most of those killed were believed to be Uzbek insurgents.

On Wednesday four suspected militants were killed in the village of Datta Khel Kalai in North Waziristan.

The ongoing strikes have complicated negotiations between Islamabad and Washington about reopening supply routes for NATO troops in Afghanistan.

Pakistan closed the routes six months ago in retaliation for U.S. airstrikes that killed 24 Pakistani soldiers along the Afghan border. The Americans say the attacks were an accident.


For years, U.S. government agencies have told the public, veterans and Congress that they couldn’t draw any connections between the so-called “burn pits” disposing of trash at the military’s biggest bases and veterans’ respiratory or cardiopulmonary problems. But a 2011 Army memo obtained by Danger Room flat-out stated that the burn pit at one of Afghanistan’s largest bases poses “long-term adverse health conditions” to troops breathing the air there.

The unclassified memo (.jpg), dated April 15, 2011, stated that high concentrations of dust and burned waste present at Bagram Airfield for most of the war are likely to impact veterans’ health for the rest of their lives. “The long term health risk” from breathing in Bagram’s particulate-rich air include “reduced lung function or exacerbated chronic bronchitis, chronic obstructive pulmonary disease (COPD), asthma, atherosclerosis, or other cardiopulmonary diseases.” Service members may not necessarily “acquire adverse long term pulmonary or heart conditions,” but “the risk for such is increased.”

The cause of the health hazards are given the anodyne names Particulate Matter 10 and Particulate Matter 2.5, a reference to the size in micrometers of the particles’ diameter. Service personnel deployed to Bagram know them by more colloquial names: dust, trash and even feces — all of which are incinerated in “a burn pit” on the base, the memo says, as has been standard practice in Iraq and Afghanistan for a decade.

Accordingly, the health risks were not limited to troops serving at Bagram in 2011, the memo states. The health hazards are an assessment of “air samples taken over approximately the last eight years” at the base.

The memo’s findings contradict years of U.S. military assurances that the burn pits are no big deal. An Army memo from 2008 about the burn pit at Iraq’s giant Balad air base, titled, “Just The Facts,” found “no significant short- or long-term health risks and no elevated cancer risks are likely among personnel” (.pdf). A 2004 fact sheet from the Pentagon’s deployment health library — and still available on its website — informed troops that the high particulate matter in the air at Bagram “should not cause any long-term health effects.” More recently, in October 2010, a Pentagon epidemiological study found “for nearly all health outcomes measured, the incidence for those health outcomes studied among personnel assigned to locations with documented burn pits and who had returned from deployment, was either lower than, or about the same as, those who had never deployed” (.pdf).

Over the years, thousands of Iraq and Afghanistan veterans have experienced respiratory and cardiopulmonary problems that they associate with their service. Some have sued military contractors for exposing them to unsafe conditions. For months, Rep. Todd Akin (R-Mo.) has urged the military to create a database of vets suffering neurological or respiratory afflictions, a move that’s winding through the legislative process. But the military has argued it doesn’t have sufficient evidence to associate environmental conditions on the battlefield with long-term health risks — and it argued that months after this memo is dated.

“As recently as April, in correspondence with the Defense Department and in discussions with my staff, the Departments of Defense and Veterans Affairs both continued to maintain that research has not shown any long-term health consequences due to burn pits,” Akin tells Danger Room. “They also maintained that remaining burn pits in Afghanistan were away from military populations to reduce exposure. It is disturbing to discover that at least at Bagram the military concluded that burn pits posed a serious health risk.”

The Iraq and Afghanistan Veterans of America (IAVA) has collected “hundreds” of anecdotes from vets complaining of health problems connected to serving near burn pits. “It’s good to see someone in the military is acknowledging there are going to be long-term problems with burn pits, but it’s disturbing that this memo is more than a year old and it doesn’t seem like the military has done anything about it,” says Tom Tarantino, IAVA’s deputy policy director, who deployed to Iraq in 2005 as an Army captain. “I lived next to a burn pit for six months at Abu Ghraib. You can’t tell me that was OK. That was pretty nasty. While I was there everyone was hacking up weird shit.”

Any visitor to the sprawling Bagram airfield knows the burn pit — if not by sight, then by smell. It’s an acrid, smoldering barbecue of trash, from busted furniture to human waste, usually manned by Afghan employees who cover their noses and mouths with medical breathing masks. Plumes of aerosolized refuse emerge from what troops refer to as “The Shit Pit,” mingle with Parwan Province’s already dust-heavy air, and sweep over the base. In February, that was where soldiers at the nearby Parwan detention facility accidentally incinerated the Koran.

At the time of the memo’s issuance, it noted that the affected population on the base contemporaneously was “40,000 Service Members and contractors.” Hundreds of thousands have cycled through the giant base since the U.S. seized it in 2001. Bagram is a major transit and logistics hub for the Afghanistan war, and one of the first bases the U.S. took and continuously operated during the war. Millions more have served in Iraq and Afghanistan near similar burn pits.

According to the Environmental Protection Agency, studies conducted on the effects of breathing in Particulate Matter 10 and 2.5 have determined “a significant association between exposure to fine particles and premature mortality.” The Army memo reports that Bagram’s air had twice the amount of Particulate Matter 10 than the federal National Ambient Air Quality Standard, and more than three times the amount of Particulate Matter 2.5 as the standard.

Burn pits remain in use across Afghanistan. And although a study by the Institute of Medicine and sponsored by the Department of Veterans Affairs found last October that there is insufficient data to correlate those pits with health risks, troops’ cardiovascular problems are clearly on the rise: There were 91,013 cases reported in 2010, up sharply from 65,520 in 2001. A 2010 study found half of a small sample of soldiers who struggled to run two miles had undiagnosed bronchiolitis. Hundreds of troops have sued the pits’ contractor operators after experiencing chest pains, asthma and migraines. For years, the U.S. government has pled ignorance about the causes of those veterans’ ailments. And unless the military formally acknowledges that the burn pits pose a long-term health risk, it will be difficult for veterans to receive long-term health care for associated respiratory and cardiopulminary ailments from the Department of Veterans Affairs.

“The acknowledgement that air-sampling data is now indicating that burn pits may pose a risk of chronic illness to our servicemen and women validates the need for the national burn pit registry that I have proposed,” Akin says. Tarantino backs him up: “We don’t want another Agent Orange scenario, where it takes 40 years for the military to admit the stuff was bad and then has to spend all this effort tracking down affected servicemembers.”

The U.S. Army and the NATO military command in charge of the Afghanistan war did not immediately respond to requests for comment.

Even casual visitors to Bagram know that the air is a menace. Within days of my most recent reporting trip there, in August 2010, I developed a disgusting, productive cough that kept me from sleeping comfortably. Airmen and soldiers joked with me about catching “Bagram Lung.”

But for at least a year, the U.S. military has known that “Bagram Lung” won’t stay at Bagram. There’s a significant chance that it will plague a generation of Afghanistan veterans for the rest of their lives.


WASHINGTON (Reuters) – The United States will require “significant firepower” in Afghanistan in 2013-14, the commander of U.S. and NATO forces there said, but decisions about further U.S. troop reductions will only be made after this fall at the earliest.
“We’re going to need combat power. I don’t think anyone questions that,” Marine General John Allen said on Wednesday. “I owe the president some real analysis on this.”
Allen spoke to reporters two days after NATO leaders discussed Afghanistan’s future in Chicago, embracing a plan to hand control to local security forces by the middle of 2013 and, Western leaders hope, to end the long, costly Afghan conflict.
By the end of this summer, Allen is due to withdraw all the 33,000 “surge” troops that President Barack Obama sent to battle the Taliban in 2009-2010.
Once those troops are gone, Allen will assess the campaign and make recommendations to the White House about how best to withdraw most of the remaining U.S. force of about 68,000.
“I intend to take a very hard look at the state of the insurgency,” Allen said, and how Afghanistan’s growing military is faring. Those factors will inform his recommendations to Obama about how many troops can be pulled in 2013 and 2014 without allowing the Taliban to stage a comeback.

“So there’s not a number right now,” he said.

While most foreign troops will be gone from Afghanistan by the end of 2014, a modest number of Western soldiers are expected to stay beyond then, focused on targeted strikes against militants and advising Afghan forces.

Yet critics, especially among Republicans as the race to November presidential elections intensifies, are already warning the Obama administration against allowing anything other than conditions on the ground and security concerns to dictate the pace of the U.S. withdrawal from Afghanistan.
While Obama’s surge drove Taliban militants out of some areas of their southern stronghold, the Afghan insurgency remains a potent enemy.
Allen appeared confident that troop reduction would not allow the Taliban to return as a more powerful fighting force.
“It is not our intention to cede the ground, ultimately, to the Taliban. And, in fact, it’s not even clear that the Taliban have the capacity to flow in” to areas that foreign troops depart, Allen said.
(Reporting by Missy Ryan and Phil Stewart; Editing by Anthony Boadle)


PROVIDENCE, R.I.—A Rhode Island National Guard member struck and killed by an armored vehicle in Afghanistan last week had moved an Afghan girl to safety shortly before the accident, military officials said.

The National Guard on Wednesday released details of the March 22 accident that killed 29-year-old Sgt. Dennis Weichel Jr. of Providence and called him a hero.

Officials say Weichel’s unit was in Laghman province when they encountered several Afghan children in the path of their convoy. They say Weichel saw a girl trying to retrieve an item under the armored vehicle and moved her to safety, then was struck.

“He would have done it for anybody,” said Staff Sgt. Ronald Corbett, who was a mentor to Weichel and who deployed with him to Iraq in 2005. “That was the way he was. He would give you the shirt off his back if you needed it.”

Weichel was posthumously awarded the Bronze Star and the NATO Service Medal Afghanistan Campaign Ribbon RI Star.

Visiting hours are set for 4 p.m. Sunday at Olson & Parent Funeral Home in Providence. He will be buried at the Rhode Island Veterans Cemetery in Exeter.

He is survived by three children, his fiancee and his parents.


Afghan President Hamid Karzai has accused the US of not fully co-operating with a probe into the massacre of 16 civilians by an American serviceman.

The accused soldier is on his way to the US where he is likely to face a military tribunal. US officials named him as Staff Sergeant Robert Bales.

Afghan MPs had demanded the soldier be tried in public in Afghanistan.

Mr Karzai earlier met relatives of the dead, who demanded justice.

This has been going on for too long. This is by all means the end of the rope here”

President Hamid Karzai

Men, women and children were shot and killed at close range as the soldier apparently went on a rampage in villages close to a Nato base in the remote Panjwai district of southern Kandahar province.

President Karzai told reporters that the chief of the official investigation into those killings had not received the co-operation expected from the US.

He also said the problem of civilian casualties at the hands of Nato forces had “gone on for too long”

“This form of activity, this behaviour cannot be tolerated. It’s past, past, past the time,” Mr Karzai told the BBC’s Lyse Doucet at the presidential palace in Kabul.

On Wednesday, Mr Karzai told the US that it must pull back its troops from village areas and allow Afghan security forces to take the lead, in an effort to reduce such civilian deaths.

The Taliban also called off peace talks in the wake of the killings although they made no mention of the massacre in their statement.
Relatives’ anguish

Earlier, the president had an emotional session with relatives of those who had been killed last Sunday. The assembled villagers berated him and urged him to seek justice.

Mr Karzai said their account was entirely different from what he called the “supposed US version” that only one American soldier was involved in the massacre.

In [one] family, in four rooms people were killed, children and women were killed and then they were all brought together in one room and then put on fire. That one man cannot do,” he said, reporting the concerns of the villagers.

The allegation that there was more than one gunman contradicts the official US version of events. But Mr Karzai assured villagers that he would pursue that line of inquiry.

“Why did this happen?” demanded the man who lost nine members of his family. “Do you have answers, Mr President?”

“No, I do not,” responded a tired-looking Mr Karzai.

Our correspondent, Lyse Doucet, says the president’s strong public condemnation of his most important ally is certain to frustrate the US. Washington has been trying to limit the damage from these latest incidents, she says, as they deal with an unpredictable president.

This intervention adds new strains to an already troubled partnership, our correspondent says.


By Amy Goodman with Denis Moynihan

We may never know what drove a U.S. Army staff sergeant to head out into the Afghan night and allegedly murder at least 16 civilians in their homes, among them nine children and three women. The massacre near Belambai, in Kandahar, Afghanistan, has shocked the world and intensified the calls for an end to the longest war in U.S. history. The attack has been called tragic, which it surely is. But when Afghans attack U.S. forces, they are called “terrorists.” That is, perhaps, the inconsistency at the core of U.S. policy, that democracy can be delivered through the barrel of a gun, that terrorism can be fought by terrorizing a nation.

“I did it,” the alleged mass murderer said as he returned to the forward operating base outside Kandahar, that southern city called the “heartland of the Taliban.” He is said to have left the base at 3 a.m. and walked to three nearby homes, methodically killing those inside. One farmer, Abdul Samad, was away at the time. His wife, four sons, and four daughters were killed. Some of the victims had been stabbed, some set on fire. Samad told The New York Times, “Our government told us to come back to the village, and then they let the Americans kill us.”

The massacre follows massive protests against the U.S. military’s burning of copies of the Quran, which followed the video showing U.S. Marines urinating on the corpses of Afghans. Two years earlier, the notorious “kill team” of U.S. soldiers that murdered Afghan civilians for sport, posing for gruesome photos with the corpses and cutting off fingers and other body parts as trophies, also was based near Kandahar.

In response, Defense Secretary Leon Panetta rolled out a string of cliches, reminding us that “war is hell.” Panetta visited Camp Leatherneck in Helmand province, near Kandahar, this week on a previously scheduled trip that coincidentally fell days after the massacre. The 200 Marines invited to hear him speak were forced to leave their weapons outside the tent. NBC News reported that such instructions were “highly unusual,” as Marines are said to always have weapons on hand in a war zone. Earlier, upon his arrival, a stolen truck raced across the landing strip toward his plane, and the driver leapt out of the cab, on fire, in an apparent attack.

The violence doesn’t just happen in the war zone. Back in the U.S., the wounds of war are manifesting in increasingly cruel ways.


LANSING, Kansas (Reuters) – U.S. authorities lack proof of what occurred the night a U.S. soldier is suspected of killing 16 villagers in Afghanistan, the lawyer representing the serviceman said on Tuesday.

“I’m very concerned now they don’t have much proof of anything,” attorney John Henry Browne told Reuters after meeting with U.S. Army Staff Sergeant Robert Bales on Tuesday for a second day in a military detention center in Kansas.

Browne said he has now spent 11 hours with Bales discussing the events of Sunday, March 11, when Bales allegedly walked off his base in southern Afghanistan and gunned down the 16 civilians, including nine children and three women, in a massacre that damaged U.S.-Afghan relations.

Bales, 38, a four-tour combat veteran, has not yet been charged, but Browne told reporters on Tuesday he expected his client to be charged with “homicide and a bunch of other charges” on Thursday. He added that the case could stretch over two years.

I don’t know what the evidence is,” Browne told reporters. “We’ve all heard the allegations. I don’t know that the government has proved much. There is no forensic evidence, there is no confession.”

Browne said Bales is still “in shock” and cast the soldier as a selfless servant of the U.S. armed forces. “He is a soldier’s soldier. He did not want to go over there but he did what he was told. He has never said anything about ‘poor little me’, which I get from my clients’ way too often. His first questions were about the safety and security of his family.”

He added that Bales may speak to his wife on the phone Tuesday night, for the first time since the incident. On Monday, Bales’ wife, Karilyn, appealed for peace and understanding.

Browne sought to downplay the effect of Bales’ financial problems, which include an abandoned property in the Seattle area and a $1.3 million fine from his time as a securities broker.

The Pentagon has previously said that Sgt Bales could face charges that carry a possible death penalty.

Such a trial could take years, contrasting with Afghan demands for swift and decisive justice.


By Qais Azimy in on Mon, 2012-03-19 14:23.

In the days following the rogue US soldier’s shooting spree in Kandahar, most of the media, us included, focused on the “backlash” and how it might further strain the relations with the US.

Many mainstream media outlets channeled a significant amount of energy into uncovering the slightest detail about the accused soldier – now identified as Staff Sergeant Robert Bales. We even know where his wife wanted to go for vacation, or what she said on her personal blog.

But the victims became a footnote, an anonymous footnote. Just the number 16. No one bothered to ask their ages, their hobbies, their aspirations. Worst of all, no one bothered to ask their names.

In honoring their memory, I write their names below, and the little we know about them: that nine of them were children, three were women.

The dead:

Mohamed Dawood son of Abdullah
Khudaydad son of Mohamed Juma
Nazar Mohamed
Payendo
Robeena
Shatarina daughter of Sultan Mohamed
Zahra daughter of Abdul Hamid
Nazia daughter of Dost Mohamed
Masooma daughter of Mohamed Wazir
Farida daughter of Mohamed Wazir
Palwasha daughter of Mohamed Wazir
Nabia daughter of Mohamed Wazir
Esmatullah daughter of Mohamed Wazir
Faizullah son of Mohamed Wazir
Essa Mohamed son of Mohamed Hussain
Akhtar Mohamed son of Murrad Ali

The wounded:
Haji Mohamed Naim son of Haji Sakhawat
Mohamed Sediq son of Mohamed Naim
Parween
Rafiullah
Zardana
Zulheja


KABUL (Reuters) – Defense Secretary Leon Panetta told troops in Afghanistan on Wednesday that the massacre of 16 Afghan civilians by an American soldier must not deter them from their mission to secure the country ahead of a 2014 NATO withdrawal deadline.

Despite calls from local residents for him to be tried in Afghanistan, the U.S. staff sergeant who killed the villagers on Sunday has been flown out of Afghanistan, the Pentagon said.

In Washington, President Barack Obama said after meeting with British Prime Minister David Cameron he did not anticipate any “sudden” change in U.S. plans for the pace of withdrawing troops from Afghanistan.
Panetta arrived amid heightened tensions over the massacre. At around the time he landed at a British airbase, an Afghan man drove a stolen pickup truck at high speed onto a runway and emerged from the vehicle in a blaze, the Pentagon said.

Pentagon spokesman George Little, travelling with Panetta, denied reports in Afghan media that the vehicle caught fire or exploded. No explosives were found on the man or in the truck.

“The Secretary, we believe, was never in danger,” Little said, adding that the driver’s motives were unclear and he was being treated for burns. A coalition member was injured when he was pulled from the vehicle as it was stolen, the Pentagon said.

In an earlier incident, a motorcycle bomb blast in Kandahar city killed an Afghan intelligence soldier and wounded two others, as well as a civilian.

A roadside bomb also killed eight civilians in southern Helmand province, where Panetta began a two-day visit by meeting with U.S. and coalition forces at two bases, Afghan provincial officials said.

“We’ll be challenged by our enemy. We’ll be challenged by ourselves. We’ll be challenged by the hell of war itself. But none of that, none of that, must ever deter us from the mission that we must achieve,” Panetta told soldiers at Camp Leatherneck, the main U.S. Marine base in the volatile area.

Panetta’s trip had been scheduled before Sunday’s shootings in two Kandahar villages, but gained added urgency as political pressure mounted on Afghan and U.S. officials over the unpopular war, now in its 11th year.

Obama called the shooting of 16 Afghans “tragic” at a news briefing with Cameron, but emphasized that both nations remained committed to completing the Afghan mission “responsibly.”

“There will be a robust coalition presence inside of Afghanistan during this fighting season to make sure that the Taliban understand that they’re not going to be able to regain momentum,” Obama said in the White House Rose Garden.

NATO leaders gathering in Obama’s home city of Chicago on May 20-21 will decide the “next phase” of the planned transition to Afghan forces taking the lead for security in 2014, he said.

The United States and Britain have the largest contingents of foreign troops in Afghanistan, but domestic support for the more than 10-year-old war has flagged, posing a challenge to Obama as he campaigns for reelection on November 6.

Obama acknowledged that people wanted the war over, but argued they still back the reason the United States invaded in the aftermath of the September 11, 2001 attacks on U.S. cities, plotted by al Qaeda militants from the sanctuary of Afghanistan.

MAJORITY WANT TROOPS HOME

In a Reuters/Ipsos poll, 40 percent of Americans said the shooting spree, in which nine children and three women were among those killed, had weakened their support for the war.

Sixty-one percent of Americans surveyed in the March 12-13 poll said remaining U.S. troops should be brought home immediately, down slightly from the 66 percent with that opinion in a similar March poll. Seventeen percent disagreed.

U.S. soldiers are the likely targets of any backlash over the killings. The Afghan Taliban threatened to retaliate by beheading U.S. personnel, while insurgents also attacked investigating Afghan officials on Tuesday.

Afghans investigating the incident had been shown video of the U.S. soldier taken from a security camera mounted on a blimp above his base, an Afghan security official who could not be identified told Reuters.
The footage showed the uniformed soldier, with his weapon covered by a cloth, approaching the gates of the Belandai special forces base and throwing his arms up in surrender, the official said.

The video had been shown to investigators to help dispel a widely held belief among Afghans, including many members of parliament, that more than one soldier must have been involved because of the high death toll, the official said.

Panetta was to hold talks with Afghan leaders, including President Hamid Karzai, with tensions high following a spate of incidents, including the burning of Korans at the main NATO base in the country last month.

DEMAND FOR AFGHAN TRIAL

While Afghan members of parliament have called for a trial of the soldier responsible for the massacre under Afghan law, Karzai’s office was understood to accept that a trial in a U.S. court would be acceptable, provided the process was transparent and open to media.

The Pentagon said the soldier, whose name has not been released, was flown out of Afghanistan. The commander of U.S. and Afghan forces in Afghanistan, General John Allen, made the decision based on a legal recommendation, a U.S. official said.

In the two Panjwai district villages where the massacre took place, U.S. troops remained confined to the compound where the soldier was based, and people in the area demanded a trial in Afghanistan under Afghan law.

“They have to be prosecuted here. They have done two crimes against my family. One, they killed them, and secondly, they burned them,” said Wazir Mohammad, 40, who lost 11 members of his family in the incident.
Panetta’s visit to Helmand – where U.S. Marines and British soldiers are battling a resilient insurgency – came a day after the first protests over Sunday’s massacre flared in the eastern city of Jalalabad.

Some 2,000 demonstrators chanted “Death to America” and demanded Karzai reject a planned strategic pact that would allow U.S. advisers and possibly special forces to remain beyond the pullout of most NATO combat troops by the end of 2014.

The U.S. military hopes to withdraw about 23,000 soldiers from Afghanistan by the end of the coming summer fighting season, leaving about 68,000.

With its mission facing increasing protests in Afghanistan, NATO said on Wednesday that it plans to boost security measures for its troops there, a decision that was based the January killing of four French soldiers by a rogue Afghan soldier.

“It’s a mix of measures concerning vetting, screening, but also training and education,” said Oana Lungescu, spokeswoman for the Western military alliance.

The plan would strengthen security measures for ISAF (the International Security Assistance Force in Afghanistan), as well as improve the vetting, screening and monitoring of Afghan forces and “crucially improve cultural awareness on both sides,” a NATO spokeswoman said in Brussels.

(Additional reporting by Ahmad Nadem in Kandahar, Mirwais Harooni in Kabul and David Alexander in Washington; Writing by Rob Taylor; Editing by Kevin Liffey and Anthony Boadle)


KABUL (Reuters) – Suspected insurgents opened fire on Tuesday on senior Afghan investigators of the massacre of 16 civilians by a lone U.S. soldier, Afghan officials said, just hours after the Taliban threatened to behead American troops to avenge the killings.

The gunmen shot from long range at two of President Hamid Karzai’s brothers, Shah Wali Karzai and Abdul Qayum Karzai, and security officials at the site of the massacre in Kandahar’s Panjwai district.

Karzai’s brothers were unharmed in the brief battle, which began during meetings with local people at a mosque near Najiban and Alekozai villages, but a soldier was killed and a civilian wounded. The area is a Taliban stronghold and a supply route.

The Taliban had earlier threatened reprisals for the weekend shooting spree, which came weeks after deadly riots across the country over the burning of copies of the Koran by U.S. troops at NATO’s main base in the country. That violence led to calls to accelerate a 2014 goal for the exit of most foreign combat troops.

“The Islamic Emirate once again warns the American animals that the mujahideen will avenge them, and with the help of Allah will kill and behead your sadistic murderous soldiers,” Taliban spokesman Zabihullah Mujahid said in a statement, using the term by which the Islamist group describes itself.

The grim warning, which was unlikely to have any impact on heavily-protected NATO soldiers on the ground, followed the February beheading of four Afghan men by insurgents in a country where such killings are relatively rare.

Tuesday’s attack, which was carried out despite tight security around Karzai’s siblings, Kandahar governor Tooryalai Wesa and Tribal Affairs Minister Asadullah Khalid, underscored the insurgents’ ability to strike at fledgling Afghan government forces.

The first protests over Sunday’s massacre also broke out in eastern city Jalalabad, where around 2,000 demonstrators chanted “Death to America” and demanded President Karzai reject a planned strategic pact with Washington that would allow U.S. advisers and possibly special forces to remain in Afghanistan beyond 2014.

An unnamed U.S. soldier — reported to have only recently arrived in the country — is accused of walking off his base in Kandahar province in the middle of the night and gunning down at least 16 villagers, mostly women and children.

A U.S. official said the accused soldier had suffered a traumatic brain injury while on a previous deployment in Iraq.

U.S. President Barack Obama, speaking after a phone call with Karzai — who is said to be furious over the latest deaths — said the shootings had only increased his determination to get American troops out of Afghanistan as planned.

However, Obama cautioned there should not be a “rush to the exits” for U.S. forces who have been fighting in Afghanistan since late 2001 and that the drawdown set for the end of 2014 should be done in a responsible way.

The soldier, from a conventional unit, was based at a joint U.S.-Afghan base used by elite U.S. troops under a so-called village support program hailed by NATO as a possible model for U.S. involvement in the country after the 2014 drawdown.

Such bases provide support to local Afghan security units and provide a source of security advice and training, as well as anti-insurgent backup and intelligence.

“CAN NO LONGER BE CALLED ROGUE”

A spokesman for the Kandahar governor Wesa said tribal elders in the area of the massacre would urge against protests and work to dampen public anger if the investigation process was transparent.

“They are supporting the government and will accept any conclusion by the investigators. Today we have meetings with people in the area and all will become clear,” spokesman Ahmad Jawid Faisal said.

NATO officials said it was too early to tell if the U.S. soldier would be tried in the United States or Afghanistan if investigators were to find enough evidence to charge him, but he would be under U.S. laws and procedures under an agreement between U.S. and Afghan officials.

Typically, once the initial investigation is completed, prosecutors decide if they have enough evidence to file charges and then could move to an Article 32 or court martial hearing.

NATO’s top commander in Afghanistan, Marine General John Allen, has promised a rapid investigation of the massacre, while security was being reviewed at NATO bases across the country.

U.S. Defense Secretary Leon Panetta said on Monday that the death penalty could be sought in the U.S. military justice system against the soldier, but portrayed the shooting as an isolated event that would not alter withdrawal plans.

While Afghan MPs in parliament called for a trial under Afghan law, Karzai’s office was understood to accept that a trial in a U.S. court would be acceptable provided the process was transparent and open to media.

Afghan MPs protested against the shooting for a second day in the capital Kabul by walking out of a session.

Analysts said the incident would complicate U.S. efforts to reach agreement with the Afghan government on a post-2014 security pact before a May summit in the U.S. city of Chicago on the future size and funding of Afghan security forces.

Thomas Ruttig of the Afghanistan Analysts Network said that despite NATO and White House references to the killings as the work of a “rogue” soldier, similar events had happened before, including a “kill team” apprehended in Kandahar in 2010.

“In the stress of an environment of escalated violence – by both sides, but particularly after Obama’s troop surge in early 2009, it looks as if most soldiers simply see Afghanistan as a whole as ‘enemy territory’ and every Afghan as a potential terrorist. This can no longer be called ‘rogue’,” Ruttig said.

(Additional reporting by Jack Kimball; Editing by Daniel Magnowski)


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Dear Friend,
A tragic and explosive story from Afghanistan shook up the nation this past weekend. Reports emerged that an American soldier killed 16 Afghan civilians, including 9 children, in a night-time massacre near a U.S. base in that country’s violent south.1 There are conflicting media accounts of what exactly happened, but graphic details have emerged of an American soldier allegedly being “drunk” and “shooting all over the place,” and then pouring chemicals over dead bodies and burning them.2
After ten years, $444 billion in U.S. taxpayer money, the lives of nearly 2,000 American service members, and countless Afghan military and civilian lives, it’s clear that a continued occupation is not in either nation’s interest. The U.S. intervened in Afghanistan to pursue the terrorists who planned the attacks on September 11. Osama bin Laden was killed in 2011. It’s long past time to end the occupation of Afghanistan.
The sickening killing rampage from this past weekend was the latest in a string of bloody violence in recent days that has fundamentally shaken up the already deteriorating political dynamic of the American occupation of Afghanistan. In recent weeks, American soldiers and officers have been gunned down as a result of a violent and massive chain reaction to the destruction of Korans in a burn pit at Bagram Air Base, an incident that has thrown the country into a mess of bloody panic, violence and horror.3 Most disturbingly, following that incident two Americans were assassinated inside a highly secure area of an Afghan interior ministry. The situation had devolved so much that NATO has pulled all of its advisers out of Afghan ministries in Kabul as a result.4
We have now reached a tipping point in Afghanistan that underscores the need for a strategy of swift, rapid and methodical withdrawal of American troops. Even before the latest unconscionable massacre, the increasing slaughter of U.S. troops and deaths of Afghan civilians in recent weeks has “exposed a crippling weakness in the American strategy to wind down the war.”5 The bloodshed of recent days has provided more tragic evidence that a political solution is not feasible for that war ravaged nation, as long as American troops remain as an occupation force.
The Obama Administration had hoped to reach a political solution to the unrest in Afghanistan before bringing our troops home. Tragically, there are no good outcomes after a decade of occupation. Only bad choices that limit future damages. Unfortunately it is incredibly unlikely that our partnership with Hamid Karzai’s current regime, which is riddled with corruption,6 hostile to women,7 and resistant to Western notions of democracy, could result in anything approaching a happy ending. While we are particularly concerned about the fate of women and girls in Afghanistan, there is no indication that a continued U.S. occupation would make a positive outcome for women possible, and there is every indication that our continued presence is making the situation much more dangerous for U.S. troops and Afghan civilians in general.
The United States is currently scheduled to hand over control of security to the Afghan army and remove American troops by the end of 2014. However, the Obama Administration is currently negotiating a strategic partnership agreement that would leave U.S. special forces and military advisers in the country indefinitely.8 Meanwhile, the majority of Americans want our troops out of Afghanistan now. As reported by the Washington Post on Sunday, majority opposition to this war has been “consistent” for nearly two years,9 and a majority of Americans want to pull out American troops from Afghanistan “even if the Afghan army is not adequately trained to carry on the fight.”10
CREDO Action members have been working with Congresswoman Barbara Lee on legislative attempts to provide a path for a responsible end to the endless war in Afghanistan. In the wake of the latest terrible tragedy in Afghanistan, it’s time to take our case directly to President Obama who as commander-in-chief has the power to finally end the disastrous decade-long occupation of Afghanistan. It’s becoming increasingly clear to Democrats and Republicans alike that we simply cannot afford the cost of the occupation in lives or treasure.
You can provide more momentum to the growing tide of public and political support for ending this war by calling on President Obama to bring our troops home by the end of 2012. Click below to automatically sign the petition:

http://act.credoaction.com/r/?r=5540563&id=36528-5154581-QCvcnLx&t=11

Thank you for speaking out to end the war.
Mushed Zaheed, Deputy Political Director
CREDO Action from Working Assets

1. Ahmad Nadem and Ahmad Haroon, “Sixteen Afghan civilians killed in rogue U.S. attack,” Reuters, March 11, 2012.
2. Ahmad Nadem, “Western forces kill 16 civilians in Afghanistan — Kabul govt,” Reuters, March 11, 2012.
3. Deb Riechmann, 2 U.S. troops are killed in Afghanistan; Quran burning backlash claims 6“, AP, March 2, 2012.
4. Graham Bowley and Alissa J. Rubin, “2 U.S. Officers Slain; Advisers to Exit Kabul Ministries,” The New York Times, February 25, 2012.
5. Greg Jaffe, “Violence in wake of Koran incident fuels U.S. doubts about Afghan partners,” The Washington Post, February 26, 2012.
6. Matthew Rosenberg and Graham Bowley, “Intractable Afghan Graft Hampering U.S. Strategy,” The New York Times, March 7, 2012.
7. Associated Press in Kabul, Hamid Karzai backs clerics’ move to limit Afghan women’s rights,” March 6, 2012.
8. Rajan Menon, “Playing Chicken in Kabul,” HuffingtonPost.com, March 6, 2012.
9. Jon Cohen, “Poll: Few in U.S. sense Afghan support for war,” WashingtonPost.com, March 11, 2012.
10. Id.


KANDAHAR, Afghanistan (Reuters) – The massacre of 16 villagers by a U.S. soldier has triggered angry calls for an immediate American exit from Afghanistan as Washington tries to negotiate a long-term presence to keep the country from sliding into chaos again.

Just days before Sunday’s attack, Kabul and Washington had made significant progress in negotiations on a Strategic Partnership Agreement that would allow American advisers and special forces to stay in Afghanistan after foreign combat troops leave at the end of 2014.

But securing a full deal may be far more difficult now after the shooting spree in villages in the southern province of Kandahar, the Taliban heartland, which killed mostly women and children.

“This could delay the signing of the Strategic Partnership Agreement,” an Afghan government official told Reuters.

The attack, the latest American public relations disaster in Afghanistan, may be a turning point for the United States in a costly and unpopular war now in its eleventh year.

Afghanistan’s parliament condemned the killings, saying Afghans had run out of patience with the actions of foreign forces and the lack of oversight.

Popular fury over the killing spree, which brought demands that the United States withdraw earlier than scheduled, could be exploited by the Taliban to gain new recruits.

“We have benefited little from the foreign troops here but lost everything – our lives, dignity and our country to them,” said Haji Najiq,” a Kandahar shop owner.

“The explanation or apologies will not bring back the dead. It is better for them to leave us alone and let us live in peace.”

Anti-Americanism, which boiled over after copies of the Muslim holy book, the Koran, were inadvertently burned at a NATO base last month is likely to deepen after the Kandahar carnage.

“The Americans said they will leave in 2014. They should leave now so we can live in peace,” said Mohammad Fahim, 19, a university student. “Even if the Taliban return to power our elders can work things out with them. The Americans are disrespectful.”

The civilian deaths may also force Afghan President Hamid Karzai to harden his stand in the partnership talks to appease a public already critical of his government’s performance.

The partnership agreement, which Washington and Kabul have been discussing for more than a year, will be the framework for U.S. involvement in Afghanistan after foreign combat troops leave at the end of 2014.

Without a pact that keeps U.S. advisors or special forces here, there is a danger that civil war could erupt again in Afghanistan because ill-trained Afghan forces would be unable to keep insurgents at bay.

The Kandahar violence came just days after the United States and Afghanistan signed a deal on the gradual transfer of a major U.S.-run detention centre to Afghan authorities, overcoming one of the main sticking points in the partnership negotiations.

“The Americans are not here to assist us they are here to kill us,” said Najibullah, 33, a house painter in Kabul.

“I hate the Americans and I hate anyone who loves them, so I hope there is no long-term partnership between our countries.”

Afghanistan wants a timeline to take over detention centers and for the United States and NATO to agree to end night raids on Afghan homes as preconditions for signing the pact.

Civilian deaths are one of the main sources of tension between Kabul and Washington.

U.S. officials warned of possible reprisal attacks after the villagers were killed in the likely “rogue” shooting.

Washington has rushed to distance the shootings from the efforts of the 90,000-strong U.S. force but faces growing criticism at home and abroad about its conduct of the war.

“The U.S. Embassy in Kabul alerts U.S. citizens in Afghanistan that as a result of a tragic shooting incident in Kandahar province involving a U.S. service member, there is a risk of anti-American feelings and protests in coming days, especially in the eastern and southern provinces,” the embassy said in an emergency statement on its website.

“NIGHT-TIME MASSACRE”

Kandahar is the birthplace of the Taliban, who were toppled by U.S.-backed Afghan forces in late 2001. Southern and eastern provinces have seen some of the fiercest fighting of the war.

The U.S. embassy said on its Twitter feed that restrictions had been placed on the movements of its personnel in the south.

A sharp increase in attacks on U.S. troops by Afghan forces followed the Koran burning. Sunday’s incident in Kandahar was one of the worst of its kind, witnesses describing it as a “night-time massacre” that killed nine children and three women.

Villagers in three houses were attacked and many civilians were wounded, a spokesman for the NATO-led International Security Assistance Force (ISAF) said.

U.S. President Barack Obama called Karzai, promising a quick investigation and to hold accountable anyone responsible for an incident he called “tragic and shocking”.

But Afghans are tired of American apologies. Such incidents are often quickly exploited by insurgents and the Afghan Taliban said it would take revenge.

“The Kandahar shootings will give the Taliban the chance to prove to Afghans that they are the freedom fighters and the Americans are the evil ones,” said Waheed Mujhda of the Afghan Analysts Network.

Sunday’s attack may also harden a growing consensus in Washington about what can be accomplished in Afghanistan.

The bill for the war has already exceeded $500 billion and more than 1,900 U.S. troops have been killed, with the total number of foreign troops killed approaching 3,000.

“These killings only serve to reinforce the mindset that the whole war is broken and that there’s little we can do about it beyond trying to cut our losses and leave,” said Joshua Foust, a security expert with the American Security Project.

Karzai, whose relationship with his Western backers is fraught at the best of times, condemned the rampage as “intentional murders” and demanded an explanation. Karzai’s office released a statement quoting a villager as saying “American soldiers woke my family up and shot them in the face”.

There were conflicting accounts of how many U.S. soldiers were involved, with witness accounts saying there were several.

Officials from the U.S. embassy, ISAF and from Washington said it appeared there was only one. An ISAF spokesman said the lone U.S. soldier “walked back to the base and turned himself in to U.S. forces this morning”.

The detained soldier was described by U.S. officials as a staff sergeant who was married with three children. He had served three Iraq tours but was on his first Afghan deployment.

(Additional reporting by Hamid Shalizi and Mirwais Harooni in KABUL, and Missy Ryan and Alister Bull in WASHINGTON; Writing by Michael Georgy; Editing by John Chalmers and Sanjeev Miglani)


A US soldier in Afghanistan has shot dead 15 civilians and wounded others after entering their homes in Kandahar province, Afghan and Nato sources say.

He reportedly left his military base in the early hours of the morning, attacking at least two homes. Nine children are among the dead.

Nato said it was investigating the “deeply regrettable incident”.

BBC correspondents expect there could be a furious backlash when news of the attack reaches the wider public.

In Kandahar’s Panjwai district, local people have reportedly gathered near the base to protest about Sunday’s killings, and the US embassy is advising against travel to the area.

President Hamid Karzai has been consulting officials in Kandahar by telephone. The region is regarded as the birthplace of the Taliban.

Anti-US sentiment is already high in Afghanistan after US soldiers burnt copies of the Koran last month.

US officials have apologised repeatedly for the incident at a Nato base in Kabul but they failed to quell a series of protests and attacks that killed at least 30 people and six US troops.

This is the first time Afghan civilians have been targeted by foreign soldiers in this way, the BBC’s Quentin Sommerville reports from Kabul.

However, a US soldier was convicted last year on three counts of premeditated murder after leading a rogue “kill team” in Afghanistan.

Prince Ali Seraj, head of the National Coalition for Dialogue with the Tribes in Afghanistan, told the BBC that Afghans would want to try the soldier in Afghanistan.

“This is going to have very, very bad effect, I believe, and I think it is time the US may have to alter their policy of not allowing their soldiers to be tried in foreign countries,” he said.

Before Sunday’s killings, relations between international forces and the Afghan people were already at an all-time low following the accidental burning of the Koran by US soldiers last month, our correspondent adds.


Nato has withdrawn all its personnel from Afghan ministries after two senior US officers were shot dead in the interior ministry building in Kabul.

Nato said an “individual” had turned his gun on the officers, believed to be a colonel and major, and had not yet been identified or caught.

Nato commander Gen John Allen condemned the attack as “cowardly”.

The shootings come amid five days of deadly protests over the burning of copies of the Koran by US soldiers.

Taliban statement

The interior ministry was put in lock-down after the shootings, officials said.

The BBC’s Orla Guerin in Kabul says eight shots were reported inside the building, which should be one of the safest in the capital, and that any Afghan who carried out the attack would have had the highest clearance.

Local media reports said the gunman was an Afghan policeman but this has not been confirmed.

The Taliban said in a website statement that it carried out the attack in response to the Koran burnings.

But Gen Jacobson would not be drawn on any link to the protests.

He said: “We have seen an emotional week, we have seen a busy week – but it would be too early to say this incident was linked.”

He added: “It is very regretful to see the loss of life again on this day, and that includes the loss of life that we have seen around demonstrations.”

Obama apology

Angry protests over the burning of the Korans continued on Saturday, with a UN compound in the city of Kunduz set alight.

Nearly 30 people have died since the protests began on Tuesday.

US personnel apparently inadvertently put the books into a rubbish incinerator at Bagram air base, near Kabul.

US President Barack Obama has apologised for the Koran-burning incident.

In a letter to his Afghan counterpart Hamid Karzai, Mr Obama said the books had been “unintentionally mishandled”.

Muslims consider the Koran the literal word of God and treat each book with deep reverence.


Published: February 1, 2012
A NATO report based on interrogations portrays an insurgency convinced it is winning even as the United States and its allies enter what they hope will be the Afghan war’s final phase.

KABUL, Afghanistan — More Taliban insurgents are being killed or captured than ever before, yet when the captives are interrogated by the American military, they remain convinced that they are winning the war.

That is because the Taliban believe that their own hearts-and-minds campaign is winning over Afghans — or so they tell their interrogators — and even converting a growing number of Afghan government officials and soldiers.

Those are among some of the findings of a NATO report, “State of the Taliban 2012,” based on 27,000 interrogations of 4,000 Taliban and other captives that portrays a Taliban insurgency that is far from vanquished or demoralized even as the United States and its allies enter what they hope will be the final phase of the war. A copy of the document, which was first reported by the BBC and The Times of London, was given to The New York Times by a Western official, on the condition of anonymity because it was classified.

The report coincides with an announcement on Wednesday by Defense Secretary Leon E. Panetta that American forces would step back from a combat role in Afghanistan as early as mid-2013, more than a year before all American troops are scheduled to withdraw.

Yet the classified report provides a sobering counterpoint to the coalition’s decidedly more upbeat public assessments of progress in the war and of the Afghanistan that NATO says it will leave behind. It abounds with accounts of cooperation between the insurgents and local government officials or security forces, as well as accounts from Taliban detainees who claim that in areas where coalition soldiers are withdrawing, the Afghan military is cooperating with the insurgents.

“Many Afghans are already bracing themselves for an eventual return of the Taliban,” the report says. The Afghan government “continues to declare its willingness to fight, yet many of its personnel have secretly reached out to insurgents, seeking long-term options in the event of a possible Taliban victory,” it adds.

The Taliban accounts may be influenced by the duress of interrogation or tinged with bravado. Yet the report’s findings roundly challenge many of the assumptions on which American policy in Afghanistan is based: that American military might will force the Taliban to the negotiating table; that the coalition’s counterinsurgency strategy will increase support for the Afghan government among Afghans; and that as NATO troops leave, Afghan security forces will be able to take over their responsibilities.

It also portrays a tight yet nuanced relationship between the Taliban and their Pakistani patrons, one not only of sometimes servile dependence, but also of frank enmity, and it says that the Taliban have gradually distanced themselves from Al Qaeda. The Taliban’s alliance with Al Qaeda was the reason that coalition forces entered Afghanistan after the attacks of Sept. 11, 2001.

Publication of the report put NATO officials on the defensive, and on Wednesday they issued an unusually detailed rebuttal. A spokesman for the NATO-led coalition played down the findings and emphasized that NATO analysts did not necessarily accept the views of the Taliban detainees as valid.

“This document aggregates the comments of Taliban detainees in a captive environment without considering the validity of or motivation behind their reflections,” said Lt. Col. Jimmie E. Cummings of the NATO-led International Security Assistance Force. “Any conclusions drawn from this would be questionable at best.”

“It is important not to draw conclusions based on Taliban comments or musings,” Colonel Cummings said. “These detainees include some of the most motivated and ruthless of the insurgents, who are inspired to play up their success. It is what they want us to believe they think.”

In Washington, the State Department’s spokeswoman, Victoria Nuland, said the report reflected a limited assessment of detainees’ attitudes and would not alter American efforts to repair the badly strained relationship with Pakistan, particularly after a mistaken border attack on Pakistani troops in November.

“It was not designed for any purpose other than to help those in the field understand what Taliban detainees were saying,” Ms. Nuland said. “So it was in no way designed to impact on our ongoing efforts to be back on track with Pakistan.”

A crucial element of the American strategy in Afghanistan is to step up the tempo of raids aimed at capturing or killing insurgents, particularly midlevel commanders; in the past two years the number of detainees has more than doubled. The raids are intended to pressure the insurgents to negotiate a peaceful settlement of the war, and in recent weeks there have been steps toward starting peace talks.

The report, dated Jan. 6, provided little evidence to believe that this strategy or the increase in the number of troops during the Obama administration had helped spur the nascent peace talks. “Taliban commanders, along with rank and file members, increasingly believe their control of Afghanistan is inevitable,” the report said. “Though the Taliban suffered severely in 2011, its strength, motivation, funding and tactical proficiency remains intact.”

It added of the insurgents: “While they are weary of war, they see little hope for a negotiated peace. Despite numerous tactical setbacks, surrender is far from their collective mind-set. For the moment, they believe that continuing the fight and expanding Taliban governance are their only viable courses of action.”

Recruits and donations for the Taliban increased over the past year, the report said, citing insurgents’ accounts.

One of the most startling elements in the report is the view by detainees that the Taliban have mostly rejected their old alliance with Al Qaeda and no longer give members of the terrorist network logistical or military support.

“In most regions of Afghanistan, Taliban leaders have no interest in associating with Al Qaeda,” the report said. “Working with Al Qaeda invites targeting and Al Qaeda personnel are no longer the adept and versatile fighters and commanders they once were.”

The report said the Haqqani network, a particularly lethal Pakistan-based faction of the insurgency that once had close ties with Al Qaeda, had not had any contacts with Al Qaeda in two years, according to detainees.

The report was apparently leaked to the BBC and The Times of London on the eve of the first high-level visit to Afghanistan since last September by a Pakistani official, Foreign Minister Hina Rabbani Khar, and both news organizations made much of Pakistan’s role in supporting the insurgents. Ms. Khar dismissed that as “old wine in an even older bottle.”

One former Obama administration official speculated that the American military might have been behind the leak. “The mood in Kabul is that the U.S. military are very critical of Pakistan,” the official said, speaking on the condition of anonymity because of military rules about discussing classified material. “They think the problem is not the Taliban, but the ISI,” the Inter-Services Intelligence Directorate, Pakistan’s spy agency.

Much of the Pakistani material in the report depicts a surprisingly unhappy alliance between the Taliban and the ISI. While it confirmed complaints by American officials that factions of the ISI cooperate with the Taliban, it also reported that Taliban leaders and fighters viewed their patrons with distrust and even hostility.

“ISI is thoroughly aware of Taliban activities and the whereabouts of all senior Taliban personnel,” the report said. “The Haqqani family, for example, resides immediately west of the ISI office at the airfield in Miram Shah, Pakistan,” the report said. The Haqqani network has been responsible for some of the most spectacular insurgent attacks of the past year, including an assault on the American Embassy and NATO headquarters in Kabul in September.

“There is a widespread assumption that Pakistan will never allow the Taliban the chance to become independent of ISI control,” the report said.

At the same time, however, it reported that Taliban commanders and fighters viewed the Pakistanis with suspicion and as “untrustworthy, manipulative, controlling and demeaning,” and cooperated with them “in lieu of realistic alternatives.” And the detainees reported no evidence that ISI directly financed or supplied the Taliban in the field, working through intermediaries instead.

But it was the accounts of cooperation between the insurgents and local government officials or security forces that seemed to most upset NATO officials. “Captured photographs of Taliban personnel riding openly in the green Ford Ranger pickup trucks of the Afghan army are commonplace throughout Afghanistan,” the report said, adding that the vehicles were “sold or donated” to the Taliban. Elsewhere it cited a document related to a plot between Afghan intelligence agents and the Taliban to ambush American soldiers.

Some of the newest material in the report covered extensive efforts by the Taliban to improve their relations with local people. The Taliban leader, Mullah Muhammad Omar, has promoted a code of conduct that sets out how insurgents should deal with people, including rules on avoiding civilian casualties and excessively brutal punishments.

The group has even instituted “hot line” numbers for citizens to make complaints about their treatment by insurgents, and it sends fact-finding committees out from headquarters in Quetta, eliciting complaints against local Taliban leaders.

The report, which also included interrogations of non-Taliban civilians who were arrested after sweeps of their communities, cited the high marks the insurgents received for their judicial activities, which in contrast to many government court actions, were offered to people without demands for payments or bribes.

Reporting was contributed by Declan Walsh and Salman Masood from Islamabad, Pakistan; Sharifullah Sahak from Kabul; and Steven Lee Myers from Washington.


BAGRAM, Afghanistan (Reuters) – U.S. helicopters fired flares to disperse hundreds of angry Afghans who massed outside the main U.S. military base in Afghanistan on Tuesday after hearing staff there had burned copies of the Koran.
U.S. Defense Secretary Leon Panetta issued an apology for “inappropriate treatment” of Islam’s holy book at the base to try to contain fury over the incident – a public relations disaster for Washington as it tries to pacify the country ahead of the withdrawal of foreign troops in 2014.

White House spokesman Jay Carney later echoed his remarks, telling a briefing, “We apologize to the Afghan people and disapprove of such conduct in the strongest possible terms.”

Protesters started to gather after Afghan laborers found charred remains of copies of the Koran as they collected rubbish from Bagram air base, the provincial governor’s office said in a statement.
As many as 2,000 Afghans massed outside several gates to the base, the main centre for NATO-led forces just north of the capital Kabul, chanting anti-foreigner slogans and throwing stones, said Reuters reporters at the scene.
Afghan President Hamid Karzai and the Taliban in Afghanistan condemned the incident, both of them saying the values of Islam had been “degraded”.
Winning the hearts and minds of Afghans is critical to U.S. efforts to defeating the Taliban, but critics say Western forces often fail to grasp Afghanistan’s religious and cultural sensitivities.
A senior U.S. official, speaking to Reuters on condition of anonymity, said staff at Bagram had decided to remove “extremist literature” and other materials left in a library in the base’s detention block.
“They (the materials) were taken out of the library for good reason but they were being disposed of in a bad way,” the official said.
“There was a breakdown in judgment in this matter but there was no breakdown in our respect for Islam,” the official added.
NATO ORDER
In a statement issued by the Pentagon, Panetta said NATO had ordered an investigation into the “deeply unfortunate” incident.
NATO’s top general in Afghanistan, General John Allen, apologized for “actions” at the base and said a new order had been given to all coalition forces in Afghanistan to take part in training in the proper handling of religious materials.
“This was not intentional in any way,” said Allen, the head of Afghanistan’s International Security Assistance Force (ISAF).
“I offer my sincere apologies for any offence this may have caused, to the president of Afghanistan, the government of the Islamic Republic of Afghanistan, and most importantly, to the noble people of Afghanistan,” he added.
The apologies did little to ease the anger.

“We want them out of our country now,” said Zmari, 30, a protester who has a shop near Bagram.

“We Afghans don’t want these Christians and infidels, they are the enemy of our soil, our honor and our Koran,” said Haji Shirin, one of the protesters at the heavily fortified compound, which is home to 30,000 foreign troops and civilians.
“I urge all Muslims to sacrifice themselves in order to pull out these troops from this soil.”
President Karzai‘s office condemned the incident and said the president had appointed a delegation of senior clerics to investigate how it occurred.
“Based on initial reports, four copies of the holy Koran have been burned and the holiest values (of Islam) been degraded,” a statement from Karzai’s office said.

The Afghan Taliban also strongly condemned the incident.

“Since the invasion of Afghanistan by the animal Americans, this is almost the 10th time that they have degraded the holiest values of Muslims,” said Taliban spokesman Zabihullah Mujahid in an emailed statement.

Bagram houses a prison for Afghans detained by American forces. The centre has caused resentment among Afghans because of reports of torture and ill-treatment of suspected Taliban prisoners.

Protests raged for three days across Afghanistan in April last year after a U.S. pastor burned a Koran in Florida.

(Additional reporting by Mirwais Harooni and Hamid Shalizi in Kabul; Writing by Michael Georgy and Rob Taylor; Editing by Andrew Heavens and Mohammad Zargham)


War zone controversies

Abu Ghraib: Several US soldiers imprisoned after photos of abuse of detainees at Iraqi prison emerge in 2004

Stryker case: US military imprisons several soldiers and is prosecuting others from 5th Stryker Brigade on charges of murdering civilians. The so-called “kill team” took photos of their victims in Kandahar province in 2010

Daily Mirror hoaxed: UK paper publishes photos in 2004, later found to be faked, allegedly showing UK soldiers urinating on and otherwise abusing Iraqi prisoners

Marine Urinating on dead Insurgents.

The pentagon will conduct a full investigation.

Now US ( united states) Marines have been caught on video relieving themselves on dead Afghans. A short clip has managed to make its way to the internet and in it people can watch four US Marines on patrol in Afghanistan urinating on the corpses of dead Afghan men. According to a note included with the video, the US servicemen were members of the Marine Scout Sniper Team 4 and the 3rd Battalion 2nd Marines from Camp Lejeune, North Carolina. That battalion has been deployed to a wide range of combat a peacekeeping situations, from Iraq, Afghanistan and Guantanamo Bay to fighting wildfires in Idaho. The unit deployed to Afghanistan in early 2011 and returned in September or October, CNN reported. At least two of four US Marines shown in a video appearing to urinate on Taliban corpses have been identified, a Marine Corps official has told the BBC.

All four US Marines seen in a video apparently urinating on dead Afghans have been identified by American military investigators, US media say.

Two of the men have already been interviewed by the US Navy’s criminal investigation branch.

The names of the men, who are thought to be Marine snipers, have not been released.

Afghan President Hamid Karzai has condemned a video that appears to show US Marines urinating on the bloodied corpses of several Taliban fighters.

The Taliban has also criticised the video as “shameful” but said it would not derail attempts at peace talks.

The US military is investigating the authenticity of the video and the Marine Corps said the actions were not consistent with its core values.

The origin of the video is not known, nor is it clear who posted it online.

The footage shows four men in military fatigues appearing to urinate on three apparently lifeless men. They have brown skin, bare feet and are dressed in loose-fitting outfits. One appears to be covered in blood.

A man’s voice is heard saying: “Have a great day, buddy.”

The men in military fatigues seem to be aware they are being filmed.

In a statement, President Karzai’s office said: “The government of Afghanistan is deeply disturbed by a video that shows American soldiers desecrating dead bodies of three Afghans.

“This act by American soldiers is simply inhuman and condemnable in the strongest possible terms. We expressly ask the US government to urgently investigate the video and apply the most severe punishment to anyone found guilty in this crime.”

Taliban spokesman Qari Yousuf Ahmadi told the BBC that this was not the first time Americans had carried out such a “wild action” and that Taliban attacks on the Americans would continue.

But a different Taliban spokesman, Zabihullah Mujahid, said the video “is not a political process, so the video will not harm our talks and prisoner exchange because they are at the preliminary stage”.

Last week the Taliban said they were working to set up a political office, possibly in the Gulf state of Qatar, that could help jump-start peace talks with the Afghan government and its Western allies.

Washington has been considering releasing several Taliban prisoners from the Guantanamo Bay jail as a confidence-building measure, Associated Press news agency says.

The video has not yet circulated widely in Afghanistan but there are fears of a backlash against the foreign presence in the country once it does.

“The US soldiers who urinated on dead bodies of Muslims have committed a crime,” Kabul resident Feda Mohammad told Reuters news agency.

“Since they’ve committed such a crime, we don’t want them on our soil anymore.”

Afghan Member of Parliament Fawzia Kofi said ordinary Afghans, no matter how they felt about the Taliban, would be upset by the video.

“It’s a matter of a human being, respect to a human being,” she told the BBC.

The actions portrayed are not consistent with our core values and are not indicative of the character of the Marines in our Corps”

US Marine Corps

“I believe that the brutal acts that the Taliban did here during their government and even now is condemned by Afghans. So is watching a brutal act by international forces. We condemn that as well,” she added.

The Taliban are known for applying a ruthless brand of Islamic Sharia law in areas they control and have carried out many suicide bombings and attacks which have killed civilians.

Investigation

The US military said it was “deeply troubled by the video” and was investigating it.

Marine Corps headquarters at the Pentagon said in a statement: “The actions portrayed are not consistent with our core values and are not indicative of the character of the Marines in our Corps. This matter will be fully investigated.”

The Nato-led International Security Assistance Force (Isaf) said it “strongly condemns the actions depicted in the video, which appear to have been conducted by a small group of US individuals, who apparently are no longer serving in Afghanistan”.

In a separate case, the US military has been prosecuting five soldiers from the army’s 5th Stryker Brigade who are accused of killing Afghan civilians during their deployment in Kandahar province in 2010.

The US has about 20,000 Marines deployed in Afghanistan, based mostly in Kandahar and Helmand provinces. In total, about 90,000 US troops are on the ground in Afghanistan.

The US and its partners in Afghanistan have said they plan to hand over security of the country and withdraw combat troops by the end of 2014.

Open Economy and Global Financial Crises

David Felix,
Washington University in St. Louis

Presented at the 9th Annual Hyman P. Minsky Conference on Financial Structure,
Jerome Levy Economics Institute,
April 21-23, 1999.

Introduction: When Theory Matters

In the 1930s mainstream economists reacted to the deepening crisis by abandoning the policies that derived from their macroeconomic theory, but without abandoning the theory. To quote Minsky:

Keynes’ novelty and relative quick acceptance as a guide to policy were not due to
his advocacy of debt financed public expenditure and easy money as apt policies to
reverse the downward movement and speed recovery during a depression. Such
programs were strongly advocated by various economists throughout the world. Part
of Keynes’ exasperation with his colleagues and contemporaries was that their
policies did not follow from their theory [Minsky 1982: p.97].

Did this matter? Yes. As the post-WW II recovery took hold, various aspects of pre-1930s mainstream macroeconomic theory emerged from the closet to provide the theoretical rationale for a progressive whittling away of Keynesian policies. The notion that the self-adjusting properties of capital markets will move capitalist economies back to full employment-full capacity growth paths reappeared in various guises.

The Great Depression was reduced to an aberration, the result of a worst case mix of bad policies that was unlikely to be repeated. Keynes had managed to get permanent acceptance of capital controls included in the Bretton Woods Articles of Agreement, a task greatly facilitated by the fact that Article VI legitimized controls already in place in most of the participating countries.1 But with the post-war recovery the controls and the Bretton Woods pegged exchange rate system itself came under increasing attack from Chicago for distorting resource allocation rather than correcting market failures.2 Concurrently, the Neoclassical-Keynesian synthesis had refocused attention from the financial to the labor market as the fundamental source of cyclical instability. When a resurgence of speculative capital flows in the late 1960s threatened the pegged exchange rate system, it was intellectually facile for proponents of the synthesis to buy into the Chicago solution of flexible exchange rates and capital decontrol. By the early 1970s mainstream economists had reassumed most of the basic tenets and policies of their laissez-faire predecessors that Keynes had attacked.

Ironically, what had become the heterodox branch of Keynesian economists, with their perception of capitalist dynamics as crisis prone, won most of the post-war theoretical debates with their neoclassical-synthesis opponents. The capital theory controversy destroyed the validity of marginal productivity as the basic determinant of factor shares in an economy with heterogeneous capital, thereby undermining an essential component of the alleged self-adjusting properties of a capitalist economy. Minsky’s financial instability hypothesis (hereinafter the FIH) further undermined the neoclassical claim that full employment was the unique rest point of long-run market dynamics. It emphasized that multi-period financial commitments linked to the construction and exchange of capital assets whose income streams are uncertain, necessarily cause the long-term growth path of laissez-faire capitalism to be path-dependent and crisis prone, in which periods of stable, full employment growth tend to self-destruct.

But the debate took place during the “Golden Age of Capitalism,” an era of unusually rapid and stable growth of output, employment, productivity and real wages.

The industrialized countries were behaving as if stable full employment growth was the norm, rather than the exception, and economists had begun asking whether the business cycle was now obsolete. The heterodox may have won the theoretical debates, but factually their victories could be dismissed by the vanquished as small beer. Minsky could write about debt deflation and single out potential post-war crises that had been aborted by timely Fed interventions. But by the end of the 1970s even he was persuaded that “It” would not happen again, because big government and built-in stabilizers were a permanent feature of post-war capitalism that would act as an effective buffer against systemic liquidity crises and debt deflation. [Minsky, 1982].

So mainstream economists lauded the replacement of the Bretton Woods pegged exchange rate system in the 1970s by floating rates, persuaded that rapid rate adjustments would now abort currency speculation, and allow more national autonomy over macroeconomic policies. They hailed the progressive lifting of capital controls and the ensuing explosion of international financial flows in the 1980s as advancing the efficient allocation of global resources. The IMF, with assists from the World Bank, the OECD and regional development banks (collectively, the IFIs), began pressuring developing countries to “get prices right” by liberalizing imports, floating the exchange rate, lifting “financial repression” and capital controls, privatizing state assets, and adopting “sound” monetary-fiscal policies. Article VI, still part of the IMF’s charter, became an embarrassment, since the IMF was honoring it in the breach. It began campaigning in the 1990s to get the article replaced by one requiring all IMF members to commit to full capital decontrol.

Results have fallen well short of expectations. Real as well as nominal exchange rate volatility have kept increasing, as has currency speculation. The incidence of systemic bank and balance of payments crises with serious international repercussions have become more frequent, and most economies have fallen into a prolonged post-Bretton Woods growth slowdown. For a time the proponents comforted themselves that the fault lay in the implementation, not the strategy; governments needed simply to accelerate market liberalization and get the sequencing right. Proponents also took comfort from the volatility of the expanding capital flows. It meant that the financial markets were doing double duty. They were not merely allocating more global resources in efficiency enhancing directions, but were also moving the liberalization process along by rewarding “sound” policies with capital inflows and punishing “unsound” policies with capital flight.

However, long before the current international crisis broke out, “sound” policies began losing substance. In the so-called “first-generation” of crisis models, capital flight occurs because the government is trying to sustain excess aggregate demand that is spilling over into a growing import surplus, by using capital controls to protect an increasingly overvalued exchange rate. Financial capital, recognizing the fragility of the effort, begins exiting the currency through evasive channels. This drains official reserves, which opens the floodgates for an all-out speculative attack [Krugman 1979]. Eliminating excess demand by tighter monetary-fiscal policies and lifting capital controls would allow the exchange rate to settle at a speculation-free equilibrium. These measures formed the core of the “sound” policy set on which the IMF conditioned its credits. But in the context of open capital markets, floating rates had undesirable feedbacks on the price level and on capital flows. Latin American countries, beset by near hyper-inflation in the aftermath of their 1980s debt crisis, shifted, with IMF acquiescence, to pegging or semi-pegging the nominal exchange rate to anchor the price level, which meant overvaluing the real rate, that is, “getting prices wrong.”

Encouraging larger capital inflows—a major desideratum of the IMF—reinforced its acceptance of pegging the nominal exchange rate. The IMF continues to insist on “sound” exchange rate policy, but in the past decade it has been “talking the talk” without being sure which way to “walk.”

Balancing the budget, and raising interest rates, other major components of the “sound” policy package, have also been sandbagged by events. The speculative attack which broke up the semi-fixed Exchange Rate Mechanism (ERM) of the European Monetary System in 1992-93 succeeded in forcing devaluation on countries that had neither an unduly large current account nor fiscal deficit [Eichengreen and Wyplosz, 1993]. The event popularized “second generation” multiple equilibria models among academic economists, in which governments give in and reward the currency speculators with a depreciated exchange rate that reduces economic welfare because the economic and political costs of defending the existing rate against the speculative onslaught have become too high.3

The IMF, however, persisted resolutely in making monetary-fiscal austerity the centerpiece of its “sound” policy set through the first year of the Asian crisis. Since then, under attack from a growing segment of mainstream economists for needlessly worsening the Asian crisis, and fearing political upheavals, the persistence has become less resolute.

In Thailand, Indonesia, and Korea, the IMF eased up in the second year and allowed substantial fiscal deficits in order to reverse declining aggregate demand, though that reflects a tactical adjustment rather than a doctrinal epiphany.4 The current bailout packet for Brazil is conditioned on fiscal austerity and higher interest rates.

The essence of the criticism of the IMF, is echt Minsky FIH [Kregel, 1998], although most mainstream defectors dare not mention the name. The IMF has been severely worsening matters by applying “first generation” corrective policies—high interest rates and fiscal austerity—to situations where the immediate need was to minimize debt deflation by sustaining liquidity and aggregate demand and getting creditors to roll over loans and extend debt servicing while most of the indebted domestic firms and banks still had positive present value. Instead, the IMF policies produced interest rate spikes, credit crunches, and collapsing aggregate demand that maximized debt deflation, forcing a high proportion of the domestic firms and banks to become Ponzi units, i.e. insolvent.

With the Asian crises worsening Japan’s and spreading to other regions, “there is, in short, a definite whiff of the 1930s in the air.” [Krugman 1999; p.58]. “It” may indeed be happening again. Krugman’s recent essay is especially interesting because his assessment of, and policy prescriptions for, the unfolding crisis, Minskyish in all but name, are at odds, as he candidly admits, with the neo-classical-Keynesian synthesis to which he still adheres. It raises again the question, if the policies are appropriate does it matter if the theory is not?

Again the answer is yes. Krugman sees the 1990s “It” as merely another anomaly rather than a systemic phenomenon. Emergency measures are required: developing countries should adopt capital controls; Japan, caught in a liquidity trap, should try harder to inflate; other industrial countries should avoid the liquidity trap and minimize debt deflation by reorienting monetary policy to low inflation rather than price level stability.

But the long-run still belongs to the neoclassical-Keynesian synthesis plus the Philips Curve, although with free capital mobility also a long-run desideratum, the “impossible trinity” limits the feasible exchange rate choices to either floating or forming currency unions within optimum currency areas. Thus while Krugman’s prescription for the current crisis is heterodox, his perspective on longer-term reform of the “architecture” of the international financial system in order to minimize the recurrence of future “Its” remains largely shaped by orthodox notions about capital market dynamics that are at odds with the FIH and its policy implications.

A fundamental implication of the FIH is that without restrictions on capital market dynamics neither exchange rate choice is a barrier against crises. Minsky, however, placed his FIH theorizing and policy implications in a closed economy setting.

Does free capital mobility reinforce or undermine its insights? I contend that it reinforces the relevance of the FIH, but weakens the relevance of the major policy inferences that Minsky drew from it. Nevertheless, a weaker set of stabilizing policies compatible with the FIH may be technically and politically feasible, despite constraints of national sovereignty and the heterogeneity of the world economy. The remainder of this paper elaborates on these contentions.

The Financial Instability Hypothesis vs. the Efficient Market Hypothesis in a World of Open Capital Accounts

At first glance, a world of open capital accounts appears to undermine the relevance of the FIH. Unless all countries are simultaneously in the fragile phase of their domestic FIH, those in that phase should by raising interest rates sufficiently be able to abort incipient credit crunches and debt deflation by drawing in capital flows from countries in the more robust phase of the FIH. But the FIH also holds that the fragile phase is the outcome of increasing leveraging by both borrowing firms and lending banks, and ebullient overvaluation of capital assets by the equity markets which deteriorates the quality of loan collateral. The liquidity squeeze that ensues and brings on a financial crisis is due to a sharp upward reassessment of lender risks. An inflow of
foreign finance that aborts the crisis therefore implies that foreign lenders disregard this reassessment.

The case for opening capital accounts globally rests on micro-foundations that validate such disregard. The inflows are normal responses because financial markets, absent regulatory distortions, behave efficiently. They are composed of rational wealth maximizing entities who therefore strive to process correctly all available information about the fundamental factors that determine the yields and risks of loans and of the
capital assets that collateralize the loans. Lenders operating in a lower interest rate environment will always be attracted to higher interest borrowers, provided the interest spread is high enough to incorporate the lender’s correctly assessed risk premium.

Lifting capital controls merely extends these efficient market dynamics to the global economy. The FIH is inapplicable not only to open economy financial relations but to closed economy ones as well.

Both the FIH and the EMH are simplified approximations intended to highlight the essentials of complex dynamic processes and to inform policy. The EMH, however, has been forced to attach successive ad hoc qualifications, Ptolemaic fashion, to its core premises and associated policies in order to protect them from falsifying events. On the other hand, while the FIH in its current state falls short of adequately explicating open economy financial dynamics, it can be readily improved without abandoning its basic structure.

Thus from the EMH perspective the rapid expansion of portfolio and direct capital flows accompanying the decontrol of the OECD capital markets must have represented a major transfer of real resources to more efficient uses. Yet Martin Feldstein and associates have convincingly shown that the high correlation between domestic savings and investment that prevailed in the OECD countries prior to decontrol declined only negligibly after decontrol [Feldstein 1994]. What have declined precipitously from 1960s rates in all the OECD countries have been the growth rates of labor, capital and total factor productivity of the business sector, and somewhat less precipitously, real GDP growth rates [Felix 1997/98, tables 2, 6]. Such trends patently contradict the improved efficiency claims.

Global forex transactions per trading day have risen from $18 billion in 1977 to $1.5 trillion in 1998, and from 3.5 times the global export of goods and services in 1977mto 60 times in 1998 [Felix 1997/98, table 1; Economic Report of the President 1999, Box 6-1]. The connection between forex flows and trade financing has obviously been attenuating as has the impact of trade imbalances on exchange rates. For a time EMH adherents lauded these developments as efficiency enhancing, since much of the rising forex flows related to greater hedging against exchange risk, and increased opportunities for beneficial arbitraging of asset prices that the opening of capital markets made possible. But the increased hedging demand has been provoked by the greater exchange volatility which the increasing forex flows were producing. The creation of novel hedging instruments by financial houses, moreover, not only spread risks but created new ones by extending the chains of liability commitments linked to the hedging operations.

And since risks can only be hedged incompletely, the financial innovations have expanded opportunities for speculative position-taking as well as for profitable arbitraging, all of which have fed exchange volatility, motivating yet more forex trading.

A decade ago a London banker summarized the dynamic as follows:

A more controversial feature of the new shape of the financial system is that the bulk of its participants now have a vested interest in instability. This is because the advent of the high-technology dealing room has raised the level of fixed costs. High fixed costs imply a high turnover is required for profitability to be achieved.

High turnover tends to occur only when markets are volatile. The analysts at Salomon Brothers…put it clearly. “Logically the most destabilizing environment for an institutional house is a relatively stagnant rate environment” [Walmsley 1988, p.13].

A decade later, a Wall Street risk consultant observes: “When one considers that risk management in the early 1970s consisted almost entirely of the evaluation of credit risk, it is breath-taking to consider the galaxy of risks we track, analyze, and manage today.” The observation is supplemented by a “partial listing” of the galaxy containing 45 different categories of risk [Beder 1997, p.347].

Disconcerting also was the rising incidence of banking and currency crises. An IMF survey reports that during 1980-95 thirty-six of its 181 members had one or more systemic banking crises, and 108 others had one or more periods of “significant banking problems,” defined as “extensive unsoundness short of a crisis” [Lindgren et al. 1996, Annex 1]. These numbers have, of course, risen significantly since 1995. A prominent econometric paper found a strong correlation between the liberalizing of domestic financial markets and the incidence of banking and currency crises [Kaminsky and Reinhart 1996]. The IMF also reports that in a sample of 50 recent currency crises, the cumulative loss of output averaged around 15% of GDP [IMF 1998].

Although the IMF survey reported that three-fourths of the OECD countries had also suffered systemic banking crises or “significant banking problems,” proponents of financial liberalization focused on developing country problems, offering contradictory but equally embarrassingly timed advice on how to integrate successfully with the global financial markets. Following the 1995 Mexican crisis and the ensuing tequila contagion, the World Bank shifted to an evolutionary approach. Its 1997 research report, Private Capital Flows to Developing Countries: the Road to Financial Integration, arrays developing countries along a continuum. At the low end are countries that were early in the process of absorbing capital flows effectively, because they still lacked “a sound macroeconomic policy framework…a sound domestic banking system with an adequate supervisory and regulatory framework, and a well-functioning market, infrastructure and regulatory framework for capital markets.” Developing countries in the early stages should approach foreign capital cautiously, using capital controls to reinforce defenses against sudden surges and withdrawals. Those who have completed the requisites for full financial integration, however, should go for it. Accelerating the movement along this evolutionary path is the increasing skill of international financial markets in assessing developing country payoffs and risks. “Contagion effects of the kind seen after the Mexican crisis are not likely to be long-lasting.” Indeed, “aggregate net private capital flows to developing countries are likely to be sustained in the short to medium term because of the continuing decline in creditworthiness risks and other investment risks, the higher expected returns in developing countries, and the fact that these countries are under weighted in the portfolios of institutional investors [World Bank 1997, pp.2-5,78].

To measure movement along the continuum the report constructed a financial integration index. In 1985-87 only Korea and Malaysia ranked as “highly integrated,” but by 1992-94, 13 developing countries were “highly integrated” and 23 were “medium integrated.”5 However, since three of the highly integrated—Argentina, Mexico and Turkey—had nevertheless suffered major financial crises in the first half of the 1990s, stable financial integration required still other requisites, such as the balanced budgets, high savings rates and export-oriented investment that had enabled the East Asian countries to fend off the “tequila effect” in 1995. Indeed,

The most dynamic emerging [capital] markets, where progress has been particularly intense during the past five years, include most of high-growth Asia (Korea, Malaysia and Thailand, with Indonesia and the Philippines not far behind).

The East Asian markets stand out for their depth and liquidity, and because of efforts undertaken in the 1990s, their infrastructures are now equal to those in Latin America [World Bank 1997, p.59].

Unfortunately for the report’s evolutionary theory, forecasting skills and market timing, all five highly integrated East Asian economies bit the dust as the report reached the bookstores.6 It dropped from sight soon after.The OECD was another victim of mistimed publishing. In contrast to the World Bank, its remedy for the burst of financial crises was to speed up the financial liberalization process.

According to its projections, that would elevate per capita GDP of the “non-OECD world” by 270% by year 2020, compared to only a 100% increase, were the pace not accelerated [OECD 1997]. The report’s optimism relied heavily on the dynamism of the “emerging non-OECD economies…from Asia and Latin America” led by the “Big Five of Brazil, China, India, Indonesia, and Russia” [OECD 1997; preface]
This report, which also appeared as the Asian meltdown was gathering momentum, also faded quickly from circulation.

A recurring obbligato accompanying the crisis-strewn path of financial globalization has been mistaken optimism that improved transparency of information, the successive Basle Accords to tighten prudential bank regulations, and learning-by-doing improvement of lending skills by the lending institutions would stabilize the financial flows. At the 1979 conference on “Financial Crises and the Lender of Last Resort” (papers published as Financial Crises: Theory, History and Policy, Charles P. Kindleberger and Jean-Pierre Laffargue editors, Cambridge U, Press 1982) the paper dealing with rising developing country indebtedness observed optimistically:

Fortunately, the data published by international organizations (BIS, World Bank, IMF), by various national monetary authorities, and by some international banks have been considerably improved in recent years, as part of a deliberate move toward better coverage and understanding of international banking transactions, to help the bankers themselves in decision processes for lending abroad, in particular, in assessing country credit risks….no country has yet been forced into default, and it remains doubtful that this could occur [Metais 1982, pp. 223-225, 232, footnote 11].

Two years later the Third World debt crisis required a concerted bailout to stanch an international banking crisis.

Greater transparency was also the centerpiece of the G-7 response to the 1995 Mexican crisis, which authorized the IMF to establish a Special Data Dissemination Standard that,

“offers countries having, or seeking, access to international capital markets, a voluntary means of providing regular, timely and comprehensive economic data. A key feature of the implementation…will be an electronic bulletin board maintained by the IMF at a World Wide Web site on the Internet” [IMF Survey September 9, 1996, p.290].

Two years later, the Asian crisis led the BIS to observe exasperatedly that “in spite of the ready availability of BIS data showing increasing vulnerability of some of the countries to a sudden withdrawal of short-term international loans, the volume of these loans simply kept on rising” [BIS 1998].

Similarly, each successive Basle Accord to tighten prudential supervision has been a reaction to near global financial crises that exposed deficiencies of the previous accords. The deficiencies reflect the dark side of the skill-enhancing learning process. It has enabled the supervised banks to devise evasive innovations that keep the Basle Committee on Banking Supervision behind the curve.

In reacting to these “anomalies” academic economists have followed two contrary paths. The new open macroeconomics of the 1980s extends the prevailing mainstream obsession with the need to anchor macroeconomics on firm neoclassical “microfoundations” to international trade and finance. The “law” of one price, purchasing power parity and the EMH should prevail in the medium-term, because with the world economy moving ever more closely to free trade and free capital mobility, rational maximizing agents were offered increasing scope for taking positions based on “sound fundamentals.” This implies that relatively stable real exchange rates should prevail.

The other path has been to test these premises and conclusions empirically. These tests, conducted mostly on data from the industrialized countries, roundly reject the conclusions and most of the premises. In a recent survey of the tests, Charles Engel summarizes the results as follows [NBER Reporter Winter 1998/99]:

  1. “The failure of the law of one price accounts for over 90 percent of real exchange rate variations. In many cases it accounts for 98 to 99 percent of the variation.”7 [p.15]
  2. Purchasing power parity can be teased from very long-term data sets (100 years or more), but for shorter intervals within this span, the effects of different monetary regimes dominate real exchange rate volatility. “Generally, when nominal exchange rates are floating, the transitory component of the real exchange rate is highly volatile; when the exchange rate is fixed, the transitory component is very quiescent.” [p.15]
  3. Short and intermediate-term exchange and interest rate dynamics currently are best explained by the Frankel-Froot model [J. Frankel and K. Froot 1990], in which forex trading is dominated by “chartist speculators who do not evaluate investment opportunities rationally, but instead chase trends.” [p.17].

Yet Engel, who has contributed importantly to this critical testing, is still intimidated enough by the neoclassical microfoundations’s restrictive concept of rational behavior to add this cautionary conclusion:

From the modern (1990s) perspective, the shortcoming of the Frankel-Froot model is that it allows irrational herding behavior by economic agents. Additional serious research is needed to understand whether nonfundamental speculation can really drive short-run behavior of exchange rates [p.17].

An essential step toward developing an alternative Minsky-Keynes open economy macroeconomics is, therefore, to anchor it to a view of rational behavior that’s more appropriate to the behavior of the agents who dominate trading in asset markets. This requires disaggregating position-taking in the organized capital asset markets beyond Minsky’s tripartite hedge, speculative and Ponzi behavior, by elaborating Keynes’ beauty contest metaphor of Chapter 12 of his General Theory. Such markets are dominated by market-timing agents, whose short-term trading, financed by bank credit, provides most of the market liquidity. Position-taking by a rational trader must necessarily be based on assessing short as well as long-term determinants of the movement of asset prices within his trading horizon. It would also be irrational for him to assume that his assessment of each determinant, and his trading horizon, are identical to those of other traders. His trading response to news affecting fundamental determinants requires, therefore, that he also assess the likely response of other traders, in the knowledge that those responses also include an assessment of how he will respond.

Since a priori deductions of the state of other traders’ expectations involves an infinite regress into subjectivity, rational traders must resort primarily to inductive reasoning. There is no way for them to validate their expectational hypotheses other than by applying them and observing the results. Inductive reasoning is a rational decision process that precludes maximizing decision making. Heterogeneous traders inductively arriving at a common set of expectations would be a special case, based not on reaching general consensus on the “true model” of how fundamentals determine equilibrium prices, but on a confluence of judgments about likely reactions of traders to news about variables that impact short and long-term expectations, Such equilibria are likely to be unstable, producing asset price bubbles and crashes.

The conditions for an expectational equilibrium to emerge among heterogeneous traders is being explored through non-linear dynamic (chaos theory) modeling.

Mimicking markets made up of heterogeneous traders with varying beliefs and feedbacks requires models that are too complex for determinate solutions, but allow numerical experimentation. Brian Arthur and his Santa Fe Institute colleagues report the following results of their experiments [Arthur et al 1997]:8

We find that if our agents very slowly adapt their forecast to new observations of the market’s behavior, the market converges on a rational expectations regime. Here ‘mutant’ expectations cannot get a profitable footing….Trading volume remains low. The efficient market theory prevails.

If, on the other hand, we allow the traders to adapt to new market observations at
a more realistic rate, heterogeneous beliefs persist, and the market self-organizes into a complex regime. A rich ‘market psychology’—a rich set of expectations—becomes
observable. Technical trading emerges as a profitable activity, and temporary
bubbles and crashes occur from time to time. Trading volume is high, with times of
quiescence alternating with times of intense market activity. The price time series
shows persistence in volatility…and in trading volume….individual behavior evolves
continually and does not settle down [p.301].

An expectational equilibrium, it must be emphasized, merely means a convergence of trader expectations about asset prices. The inference that they are guides to the optimal allocation of resources in the real economy would be unwarranted. George Soros’ concept of reflexivity similarly stresses the self-referential formation of financial market expectations in his critique of the EMH [Soros 1994]. The inference that is warranted is that the neoclassical microfoundations are a poor basis on which to erect macroeconomic theory, whether open or closed.

The FIH gives direction to the above taxonomy. Financial markets become progressively more active during self-reinforcing runs of optimistic expectations,
sustained by the increasing willingness of banks to fund leveraged position-taking by
speculating traders. But the effect on new investment and credit risk according to the closed economy FIH has to be broadened in an open economy version to incorporate
exchange rate and other risks generated by free capital mobility, because these impact not merely the level but also the composition of investment, That is, the increasing volatility of interest and exchange rates raises the hurdle rate, which tilts investible funds toward projects with faster expected payoffs.9 Perceptions of credit risk may continue to decline, but a rising hurdle rate will concurrently steer investible funds toward shorter gestation projects: toward mergers and acquisitions rather than greenfield construction, and toward increasing “stockholder value” via share buybacks, and speculative financial forays. The declining growth rates of productivity and real GDP in the OECD countries that have accompanied the shift to floating exchange rates and the lifting of capital controls appear to reflect this dynamic.

Thus an increasing share of resources has been drawn to activities that supply liquidity and transfer ownership and risk. From the mid-1950s on, the share of GDP in each of the G-7 countries devoted to Finance, Insurance, and Real Estate (FIRE) has risen almost monotonically. Until the mid-1970s, the rising FIRE/GDP ratios were paralleled by rising real growth rates of non-financial goods and services, supporting the conventional view that financial deepening promotes real growth. Since then, however, the real growth of the non-financial sectors of each of the G-7 has fallen off even more than has real GDP growth, suggesting that the post-Bretton Woods rise of FIRE/GDP has been crowding out non-financial growth [Felix 1996; Charts 1-7]. Other data show that the share of the OECD labor force employed in finance proper rose 21% higher and the share of OECD investment in finance rose 104% higher in 1980-93 over their 1970-79 averages [Edey and Hviding 1995; Table 2]. Since 1975 financial services has been the fastest growing component of international trade, rising at 13% per annum, while FDI in financial facilities led the overall growth of FDI in services during the 1980s [OECD 1994, pp.38-40].

In sum, the claim that major welfare gains have ensued for both the industrial and developing countries from decontrolling capital markets has been, in Bhagwati’s trenchant phrase, “banner waving.” [Bhagwati 1998]. Instead of citing empirical support that such gains have ensued, the claimants have been tautologically trumpeting their theoretical claims as a posteriori proof.10

The most vulnerable participants in the globalizing financial system, the developing countries with their thin financial markets and more limited technological and managerial flexibility, have tried to strengthen defenses against currency runs by building up forex reserves. In 1997 they held 55% of global official reserves while doing less than 25% of global trade. With the dollar as the chief vehicle currency for trade and capital flight, a complex but unstable symbiosis has emerged between the U.S., the developing countries, and the rest of the OECD. Thus far it has benefited the U.S. economy at the expense of the others, but its dynamics include adverse feedbacks that are likely over time to erode the U.S. gains.

The U.S. benefits to date extend well beyond seignorage gains, which most estimates put at between 0.5 and 1.0 percent of U.S. GDP.11 The collective response of developing countries to their contagious currency crises has been to increase their desired reserve levels and to try to reach these levels by intensifying their exporting to the industrial countries, which has been deflating prices for imported consumer goods and industrial materials. However, because of the premier position of its currency, the U.S. has been able to export the dollar at will in exchange for these imports, i.e., run increasing trade deficits without being forced to raise its short-term interest rate to deter capital flight. Were more developing countries to shift in desperation to currency boards or, as in the case of Argentina, from currency board to complete dollarization, they would be further increasing the capacity of the U.S. to fund rising trade deficits. That is, the incessant demand for more dollar reserves by developing countries to protect against currency crises keeps overriding the corrective mechanism of conventional analysis, in which increasing foreign liabilities should limit the size of U.S. trade deficits, because foreign holders become unwilling to hold more dollars except at higher dollar interest rates. The other industrial countries, on the other hand, while benefiting from the improved terms of trade, have had to pay for their cheapened imports with exports and higher short term real interest rates.12

The dark side for the U.S. is that its dollar exporting is deepening a “Dutch disease” dilemma. U.S. residents whose income and wealth comes from ownership of financial assets, or who are employed in skilled positions in the non-traded goods sector, have garnered the lion’s share of the benefits. Those in the traded goods sector, on the other hand, have suffered losses of high productivity manufacturing and primary sector positions and an out-migration of labor to low wage service sector jobs. The result is a
resurgence of Wall Street-Main Street tensions over monetary and trade policy with interesting implications for the current debates over reforming the “architecture” of the global financial system.

Also threatening the favorable U.S. dynamics is the emergence of the euro as a potentially major alternative vehicle currency, and the diverging positions between the U.S. and most of the other G-7 on financial crisis management. Washington is encountering increased difficulty getting the other G-7 countries to keep contributing to the IMF bailouts and to acquiesce to its hands-off position on floating exchange rates and
free capital mobility.

Finally, the industrialized countries, most of all the U.S., have been basking in asset price trends that, as per the FIH, appear unsustainable. Since 1982 real interest rates on 10-year government bonds of each of the G-7 have averaged around twice their Bretton Woods averages [Felix 1997/98: Table 7]. Capital decontrol appears to account for most of the difference. That is, in the Bretton Woods era, when capital controls were
in place in most of the G-7, the only easy options open to holders of long bonds anticipating inflation from a credit-easing policy, were to shift to shorter-term bonds or to equities. Both moves tended to reinforce the policy goal of bringing output and employment closer to capacity. But with the capital decontrol of the 1980s, quick, easy movements by institutional investors between domestic and foreign bonds and equities,
and covered and uncovered interest arbitraging by banks and hedge funds, countered efforts to lower real interest rates, short and long. The U.S. has been only a partial exception. The reserve currency dominance of the dollar has allowed the Fed greater scope for lowering short-term real interest rates than has been permitted other G-7 central banks, but that advantage has not extended to long-term real rates.

The high long-term real rates presage a deepening of the current globalizing crisis. From the early 1980s on, they have been exceeding GDP growth rates by a rising percentage in each of the G-7. In the past decade, interest rates on 10-year governments have averaged more than double the GDP growth rates. The only historic parallel for this is the inter-war era, with the depressed 1930s accounting for most of the GDP growth shortfall. By contrast, during the pre-WWI Gold Standard era real interest and real GDP growth rates were equivalent [Felix 1997/98: Table 9]. With debt expanding faster than GDP since the early 1980s, the rentier share of G-7 income has been rising persistently.

High real interest rates should deter investment, but they have merely held back real not financial investment, as is evidenced by the explosive growth of M & A and equity prices. Capital’s overall share of national income has thus been rising, and since bonds and equities are mostly held by the top income decile, household income and wealth concentration has also been rising. Capital’s share can’t reach 100%. But stabilizing speculation seems far less likely to bring about a smooth asymptotic leveling of the share than are collapsing asset bubbles and political backlashes to terminate this open economy manifestation of the FIH in a hard landing, approximating–hopefully not too closely–that which terminated the 1920s asset price boom.

Reforming the “Architecture” of the Global Financial System

So is it adios EMH and bienvenido FIH? Not quite. The need to reform the “architecture” is now generally acknowledged, as is the need to reduce the volatility of short-term capital flows and the excessive reliance of developing countries on short-term external financing. But EMH thinking still imbues mainstream reform proposals, while Minsky’s closed economy policy advice for thwarting financial crises needs adaptation toopen economy conditions.

Washington and the IMF now include proposals to improve risk assessing by the major financial markets and to improve bank supervision, along with a litany of reforms directed at developing country financial management [Cf. Group of 22 Reports 1998].

They have also quietly suspended their twin crusades to universalize the adoption of capital decontrol and the Mutual Agreement on Investment (MAI). However, the premise that the freedom of capital to move globally is a major public good remains intact. The intent is to resume the two campaigns when the current crisis has subsided.

The proposals for improving risk assessing and bank regulation single out the same targets—inadequate information and transparency, better value-at-risk bank procedures— that successive architectural reforms since the first Basle Accord have aimed at. That this time they’ll finally get it right presumes that the EMH can finally be validated.

The proposals, however, bring to mind the old vaudeville interchange between two drunks fighting off imaginary leprechauns. “Close the door! They’re comin’ through the window! Close the window! They’re comin’ through the door!” That is, proposals to reduce excessive risk-taking by banks and institutional investors would increase contagion, while those that might reduce contagion would increase bank and
investor risk.

The value-at-risk (VAR) models used by banks to lessen the riskiness of their proprietary trading, hedge fund financing, and customized derivative mongering, are charged with not only encouraging excessive risk-taking by the banks, but also with intensifying contagion effects [Cf. Folkerts-Landau and Garber 1998]. By relying on backward-looking variance-covariance matrices and normal risk distributions they tended to underestimate the probability of large losses from taking long and short asset positions (the flaw that bankrupted the Long Term Asset Management hedge fund). Contagion was intensified because a volatility event in one country automatically generated an upward re-estimate of credit and market risk in a correlated country, which triggered automatic margin calls and tightening of credit lines in both countries. Such risk control methods help explain why Malaysia’s capital controls and Russia’s default produced a widespread cutoff of lending to developing countries. Tightening VAR methodology to lower risk-taking by banks is likely to strengthen contagious reactions.

Bond rating agencies are also caught between conflicting goals. They have been criticized for down-grading Asian bonds too late to alert investors pre-crisis, and then for “reactive downgrading of Asian sovereign ratings from investment grade to ‘junk status,’ [which] reinforced the region’s crisis…by forcing institutional investors who are required to maintain investment-grade portfolios to offload Asian assets. In response the rating agencies, having begun downgrading Latin American assets because of contagion risks rather than solely because of deteriorating fundamentals, are being accused of thereby reinforcing global crisis contagion” [Reisen 1998, p.19].

Conversely, a recent OECD policy brief [Reisen 1998] offers two proposals to reduce contagion that would surely increase investor risk. One is to remove investment grade requirements for pension funds and other bond-holding institutions and force them “to rely on their own judgment, rather than moving like herds on rating signals.” The other attacks the 1988 Basle Accords for assigning only a 20% risk-weight to bank loans of less than a year, and a 100% risk-weight to longer-term loans. This biases banks to lend short-term to developing countries and to engage in excessive inter-bank lending.

The policy brief proposes removing the “distortion” by equalizing the risk-weights. But the weights were designed to correct the excessive maturity mismatching between their short-term liabilities and the medium-term loans to developing countries that had brought major international banks to near insolvency in the early 1980s debt crisis; which proves that in finance one man’s “distortion” is another’s “correction.”

Improving risk assessment by requiring more timely and accurate data about foreign borrowers is another proposal that’s unlikely to prevent herd behavior by lenders.

Prior to the Asian crisis, “in spite of the ready availability of BIS data showing increasing vulnerability of some of the countries to a sudden withdrawal of short-term international bank loans, the volume of these loans simply kept rising” [BIS 1998]. This was in part because banks were securitizing their loans and then marketing the securitized bonds, shifting the credit risk to the bondholders. Securitizing also removed loans from bank balance sheets, enabling them to evade the risk-equity requirements of the 1988 Basle Accords and leverage a larger volume of loans from their equity. But diverse bondholders are more prone to herd behavior than are large banks. As Wall Street economist John Lipsky observes, “in a world of mobile, securitized capital, there is little likelihood that the IMF staff will be able to construct a credible stabilization program, including the needed structural reforms under crisis conditions in a matter of days” [Lipsky 1998].

Thus when market nervousness sets in, the timely publicizing of negative information is likely to exacerbate panicky withdrawal and contagion. Fear of such a reaction dissuaded the U.S. Treasury and the Fed from publicizing their adverse assessments of Mexico’s financial health until after the crisis broke out [Wessel et al. 1995].

All this fits the FIH view that financial market dynamics are inherently too unstable to be left alone after a one-time fix. Minsky, however, couched his stabilization advice in a closed economy setting. He assumed a single central bank that could effectively intervene as lender of last resort (LOLR) and a large public sector with a progressive tax structure and expenditure commitments that would allow automatic fiscal stabilizers to set a high floor under aggregate demand. His “anti-laissez-faire theorem,” an in-your-face rejection of the EMH’s contention that “policy surprises” are the main destabilizers of market behavior, also requires an activist government able to impose timely new “thwarting mechanisms.” [Ferri and Minsky 1992].13 Adapting these apercus to a global setting of decontrolled financial markets with no global LOLR, and national economies with varying policy goals, is, however, a complex exercise in political economy. Barry Eichengreen splits the current spate of architectural reform proposals in two groups: those that are “singularly unrealistic” and those that are “singularly unambitious.” In the first group he places—justifiably in my view—proposals for an international central bank to act as global prudential overseer and LOLR, an international bankruptcy court to settle debt conflicts, and other visionary schemes that demand
massive institutional and political transformations to become feasible. In the second group he puts mainstream proposals, such as cited above.

Escaping this depressing taxonomy, however, may be collective action shaped by the FIH, for a minimalist reprise of Bretton Woods. Recall that the Bretton Woods system was able to reconcile national and global stability needs fairly well for a quartercentury, facilitating, by most welfare criteria, “the Golden Age of Capitalism.” The conditions that accounted for its success—capital controls, a United States with the capacity to act as LOLR to the capitalist world, and Cold War anti-Communism as a motivating ideology—have since dissipated. But a modest approximation of Bretton Woods compatible with today’s changed conditions is technically, and may be becoming politically, feasible. The approximation requires implementing two interrelated reforms of the global financial architecture. One is a Big Three agreement to reduce exchange rate volatility by bounding the cross-rates between the dollar, euro and yen within a target
zone, with the other economies left free to tie their currencies tightly or loosely as they see fit to one of the three reserve currencies. The second, directed at weakening the capacity of financial markets to break up band arrangements, is a collective agreement to tax global forex transactions along the lines of the Tobin tax proposal.

Bounding the Big Three currency fluctuations provides a looser equivalent of the fixed dollar-gold price that had anchored the Bretton Woods adjustable peg system. To be effective, the Big Three would have to intervene jointly in the forex market to keep exchange rate fluctuations within the target zone. With open capital markets they would also have to subordinate other monetary-fiscal policy goals to the task. But the ease with which rampaging capital flows broke up the 1987 Louvre target zone agreement and the
ERM makes clear that protecting a Big Three target zone from such rampages is essential. A global Tobin tax could not only perform this task, but could also substantially reduce the collective coordination of monetary-fiscal policies required to sustain the target zone.

Tobin’s proposal for an international agreement to tax forex transactions at a small, uniform rate offers a “market friendly” way of deterring capital market rampages.

Instead of pointy or round-headed bureacrats trying to screen out hot money flows under a direct capital controls system, the tax leaves the screening to the markets. Around 80% of the $1.5 trillion global forex transactions per trading day are legs of round trips of a week or less. Most relate to arbitraging and open speculating by currency dealing banks, investment houses, hedge funds and multinational corporations, seeking to profit by taking large short-term positions to exploit small, transitory margins. A small tax on all
forex transactions would cut heavily into these margins and return on capital. It would impact negligibly the return on capital from international trade and FDI, since these involve much longer round trips and much higher profit margins per round trip.

Moreover, the tax on trade and FDI forex transacting would be compensated by reduced exchange risk and hedging needs attendant on more stable Big Three cross-rates.

The tax would help stabilize exchange rates in two additional ways. The tax revenue would substantially increase the resources available to the monetary authorities to counter-speculate in the forex markets. And reducing currency arbitraging would lessen the macro-policy coordination needed to sustain the target zone arrangement. The last is because the tax widens the interest rate differentials across currencies required to make arbitraging profitable. Indeed, the increased scope that the tax would provide national economies to implement full employment and other welfare goals without being immediately sandbagged by anticipatory capital flight is what originally motivated Tobin to propose the tax. By slowing the reaction speed of the globalized financial markets, the tax would allow welfare oriented policies more time to manifest results.
The tax effects vary non-linearly with the size of the tax, the response elasticities, and enforcement leakages. A recent set of conference papers sponsored by the United Nations Development Programme (UNDP) produced some converging of views concerning each of these three effects [Ul Haque et al. eds.1996]

  1. A tax of 0.1% on global forex transactions applied to the 1998 volume would produce between $180 and $220 billion revenue per annum, and a one-time drop of forex volume of from 13% to 49%, the variation reflecting different assumptions about pretax transaction costs and response elasticities.14 Almost all would impact short-term trading. For arbitraging strategies involving round trips each trading day the annualized tax would be 48%, while for international trade involving a 90 day financial trip, the annualized tax would be 0.8%
  2. Universal agreement would not be necessary to implement the tax. The U.K., the U.S., Euroland and Japan account for around 80% of global forex turnover. Bringing in Switzerland, Singapore and Hong Kong would raise the coverage to 91%. The remaining countries could be brought on board in one fell swoop by making joining a prerequisite for IMF loans.
  3. The tax should be levied on forwards and swaps as well as spot transactions, but how to tax customized derivatives effectively remains to be answered.
  4. To minimize offshore evasion, the tax should be levied at dealing rather than booking or settlement sites. Global forex dealing is dominated by a few dozen large financial houses, most of them headquartered in London and the Big Three. Their dealing rooms employ expensive equipment and talent. Moving dealing rooms as distinct from booking or settlement offices to tax free sites would be very costly. Doubling the tax when one of the counterparty is domiciled in a tax free location would be an effective deterrent. At least two financial houses would then have to move their expensive dealing operations concurrently to tax-free sites for evasion through relocation to work [Cf. Kenen 1996].
  5. Applying the tax to all instruments that have liquid, high volume markets, such as cross-currency treasury bill swaps, would minimize the payoff from shifting to nontaxed instruments. But since “financial engineers” would doubtless try to devise synthetic instruments to fit the bill, the tax agreement would need a supervisory body to oversee tax implementation and to recommend new “thwarting” changes as needed [Garber 1996; Kenen 1996]. However, gaming between financial authorities and financial innovators also plague the conventional proposals to improve the “architecture” of the global financial system, so is no basis for a priori dismissal of the Tobin tax.
  6. Because the tax would be collected by national tax authorities, the size of the tax revenue collected by the participating nations would differ enormously. The collective agreement to tax would also have to include an understanding on the allocation of the revenue. How much should be centralized? How much of the central fund should be devoted to a global LOLR function, and how much for projects in the developing countries, are distributive issues that the negotiators of the agreement would have to address.
  7. Finally, while the tax is primarily a crisis deterring device, allowing member countries individually or in concert to raise the tax rate above the uniform rate when under siege, could ameliorate crises by impeding capital flight and contagion, and with less reliance on interest rate spiking and demand-depressing measures to allay the currency runs.

Opposition from Washington renders nil the immediate prospects that reforms along the lines of this minimalist reprise of Bretton Woods will be taken up at the IMF, the G-7, or other official policy forums. The attempt by France, Germany and Japan to put a Big Three target zone proposal on the agenda of the recent G-7 ministerial meeting in Bonn was slapped down peremptorily by the U.S. delegation. The Tobin tax hovers like Banquo’s ghost over the G-7 and IMF conference tables. Indeed, Washington even suppressed the attempt by the UNDP to promote its aforementioned volume of conference papers on the tax [Le Monde Diplomatique, February 1997, “Le projet de taxe Tobin, bete noire”].

Political dynamics could, however, improve the medium-term prospects for the two proposals. The heightened priority that Euroland governments are giving to job creation while protecting the welfare state, will require protecting the euro against currency runs. Despite Washington’s opposition, European pressure for collective action to bound the Big Three cross rates is therefore likely to persist. While still off the table at
the governmental level the Tobin tax is, surprisingly, picking up grass roots support. A coalition of NGOs, academics and unions have succeeded in getting the Canadian House of Commons on March 23 to pass a bill by a 2 to 1 majority stating “That in the opinion of the House, the government should enact a tax on financial transactions in concert with the international community.” ATTAC, a movement of similar composition, has been gathering considerable support in France, and is spawning sister movements in other
Euroland countries.

 Economic logic, if not grass roots pressure, is pushing in a like direction in Japan. With its short-term interest rate locked in a liquidity trap, the government has been attempting to revive aggregate demand by monetizing a very sizeable increase of its fiscal deficit. The effort is threatened, however, by a flight from longer-term bonds that’s pushing up longer rates and increasing exchange rate volatility. The higher long rates depress aggregate demand directly and further weaken the fragile balance sheets of Japanese banks, while volatile exchange rate movements could heighten trade tension with the U.S. and even force Asian countries into another round of devaluation. Hence Japan’s support for bounding the Big Three cross rates remains strong, with Finance Minister Miyazawa almost dropping the second shoe by announcing his support for “market friendly” regulation of capital flows. [Reuters dispatch, March 1, 1999].

No comparable grass roots Tobin tax movement is yet evident in the U.S. But the persisting global crisis and the U.S. role of global consumer of last resort is reviving Main Street-Wall Street tensions. A widening array of import-competing activities with political clout is demanding import protection. Washington’s attempt to ride both its high horses—free trade and free capital mobility—is becoming politically precarious.

Concern that the momentum is with Main Street is evoking fearful memories of Smoot-Hawley among academic and media pundits. Will this persuade Washington to accept constraints on Wall Street in order to save free trade, or will it fall between the two steeds trying to accommodate both? Given the current level of Washington statesmanship, the odds favor the second. They could, however, shift to the first, were more mainstream economists to give up their addiction to the EMH, thereby depriving the case for free capital mobility of its intellectual cover.

References

ARTHUR, W. Brian, John H. HOLLAND, Blake LE BARON, Richard PALMER, Paul TAYLOR 1997 “Asset Pricing Under Endogenous Expectations in an Artificial Stock Market,” Economic Notes, vol. 26, no.2 Banca Monte dei Paschi di Siena. pp.297-330.
BANK FOR INTERNATIONAL SETTLEMENT 1998, 68th Annual Report, Basle, Switzerland
BEDER, Tania S. 1997, “What We’ve Learned About Derivatives Risk in the 1990s,” Economic Notes, vol.26 no.2, Banca Monte dei Paschi di Siena, pp.337-356.
Bhagwati, Jagdish 1998 “The Capital Myth,” Foreign Affairs, vol. 77 no.3, pp.7-12
DIXIT, Avinash 1992, “Investment and Hysterisis,” Journal of Economic Perspectives, Winter, vol. 6, pp.107-132.
EDEY, Malcolm and Ketil HVIDING 1995, “An Assessment of Financial Reform in OECD countries,” OECD Economic Studies No. 25, Paris.

EICHENGREEN, Barry and Charles Wyplosz 1993, “The Unstable EMS,” Brookings Papers on Economic Activity, vol.1, no.1, Washington, D.C., The Brookings Institution, pp.51-143
ENGEL, Charles M. 1998/99, ‘Exchange Rates and Prices,” NBER Reporter, Cambridge, MA, National Bureau of Economic Research. Winter.
FELIX, David 1997/98, “On Drawing General Policy Lessons From Recent Latin American Currency Crises,” Journal of Post Keynesian Economics,” vol.20, no.2, Winter.
FELIX , David 1996, “Financial Globalization versus Free Trade: the Case for the Tobin Tax,” UNCTAD Review 1996, Geneva, United Nations Conference on Trade and Development, pp.63-104.
FELIX, David and Ranjit SAU 1996, “On the Revenue Potential and Phasing in of the Tobin Tax,” in Ul Haque et al. op. cit., Chapter 10.
FERRI, Piero, and Hyman P. MINSKY 1992, “Market Processes and Thwarting Mechanisms,” Jerome Levy Institute Working Paper No. 64.
FOLKERTS-LANDAU, David and Peter GARBER 1998, “Capital Flows From Emerging Markets in a Closing Environment,” Global Emerging Markets vol.1 no.3, London, Deutche Bank Research, pp. 69-83.
FRANKEL, Jeffrey 1996, “How Well Do Markets Work: Might a Tobin Tax Help? In Ul Haque et al. op. cit., Chapter 2.
FRANKEL, Jeffrey and Kenneth FROOT 1990, “Chartists, Fundamentalists and the Demand for Dollars,” in A. Courakis and M. Taylor eds., Private Behavior and Government Policy in Interdependent Economies, Oxford, Clarendon Press.
FRIEDMAN, Milton 1953, Essays in Positive Economics University of Chicago Press.
GARBER, Peter M. 1996, “Issues of Enforcement and Evasion in a Tax on Foreign Exchange Transactions,” in Ul Haque et al. op. cit., Chapter 5.
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HELLEINER, Eric 1994, States and the Resurgence of Global Finance: From Bretton Woods to the 1990s, Ithaca, NY, Cornell University Press.
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KAMINSKY, Graciela and Carmen REINHART 1996, The Twin Crises: The Causes of Banking and Balance of Payments Crises, International Finance Discussion Paper No. 544, Washington, D.C., Board of Governors of the Federal Reserve System.
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KINDLEBERGER, Charles P., and Jean-Pi

David Felix,
Washington University in St. Louis

Presented at the 9th Annual Hyman P. Minsky Conference on Financial Structure,
Jerome Levy Economics Institute,
April 21-23, 1999.

Introduction: When Theory Matters

In the 1930s mainstream economists reacted to the deepening crisis by abandoning the policies that derived from their macroeconomic theory, but without abandoning the theory. To quote Minsky:

Keynes’ novelty and relative quick acceptance as a guide to policy were not due to
his advocacy of debt financed public expenditure and easy money as apt policies to
reverse the downward movement and speed recovery during a depression. Such
programs were strongly advocated by various economists throughout the world. Part
of Keynes’ exasperation with his colleagues and contemporaries was that their
policies did not follow from their theory [Minsky 1982: p.97].

Did this matter? Yes. As the post-WW II recovery took hold, various aspects of pre-1930s mainstream macroeconomic theory emerged from the closet to provide the theoretical rationale for a progressive whittling away of Keynesian policies. The notion that the self-adjusting properties of capital markets will move capitalist economies back to full employment-full capacity growth paths reappeared in various guises.

The Great Depression was reduced to an aberration, the result of a worst case mix of bad policies that was unlikely to be repeated. Keynes had managed to get permanent acceptance of capital controls included in the Bretton Woods Articles of Agreement, a task greatly facilitated by the fact that Article VI legitimized controls already in place in most of the participating countries.1 But with the post-war recovery the controls and the Bretton Woods pegged exchange rate system itself came under increasing attack from Chicago for distorting resource allocation rather than correcting market failures.2 Concurrently, the Neoclassical-Keynesian synthesis had refocused attention from the financial to the labor market as the fundamental source of cyclical instability. When a resurgence of speculative capital flows in the late 1960s threatened the pegged exchange rate system, it was intellectually facile for proponents of the synthesis to buy into the Chicago solution of flexible exchange rates and capital decontrol. By the early 1970s mainstream economists had reassumed most of the basic tenets and policies of their laissez-faire predecessors that Keynes had attacked.

Ironically, what had become the heterodox branch of Keynesian economists, with their perception of capitalist dynamics as crisis prone, won most of the post-war theoretical debates with their neoclassical-synthesis opponents. The capital theory controversy destroyed the validity of marginal productivity as the basic determinant of factor shares in an economy with heterogeneous capital, thereby undermining an essential component of the alleged self-adjusting properties of a capitalist economy. Minsky’s financial instability hypothesis (hereinafter the FIH) further undermined the neoclassical claim that full employment was the unique rest point of long-run market dynamics. It emphasized that multi-period financial commitments linked to the construction and exchange of capital assets whose income streams are uncertain, necessarily cause the long-term growth path of laissez-faire capitalism to be path-dependent and crisis prone, in which periods of stable, full employment growth tend to self-destruct.

But the debate took place during the “Golden Age of Capitalism,” an era of unusually rapid and stable growth of output, employment, productivity and real wages.

The industrialized countries were behaving as if stable full employment growth was the norm, rather than the exception, and economists had begun asking whether the business cycle was now obsolete. The heterodox may have won the theoretical debates, but factually their victories could be dismissed by the vanquished as small beer. Minsky could write about debt deflation and single out potential post-war crises that had been aborted by timely Fed interventions. But by the end of the 1970s even he was persuaded that “It” would not happen again, because big government and built-in stabilizers were a permanent feature of post-war capitalism that would act as an effective buffer against systemic liquidity crises and debt deflation. [Minsky, 1982].

So mainstream economists lauded the replacement of the Bretton Woods pegged exchange rate system in the 1970s by floating rates, persuaded that rapid rate adjustments would now abort currency speculation, and allow more national autonomy over macroeconomic policies. They hailed the progressive lifting of capital controls and the ensuing explosion of international financial flows in the 1980s as advancing the efficient allocation of global resources. The IMF, with assists from the World Bank, the OECD and regional development banks (collectively, the IFIs), began pressuring developing countries to “get prices right” by liberalizing imports, floating the exchange rate, lifting “financial repression” and capital controls, privatizing state assets, and adopting “sound” monetary-fiscal policies. Article VI, still part of the IMF’s charter, became an embarrassment, since the IMF was honoring it in the breach. It began campaigning in the 1990s to get the article replaced by one requiring all IMF members to commit to full capital decontrol.

Results have fallen well short of expectations. Real as well as nominal exchange rate volatility have kept increasing, as has currency speculation. The incidence of systemic bank and balance of payments crises with serious international repercussions have become more frequent, and most economies have fallen into a prolonged post-Bretton Woods growth slowdown. For a time the proponents comforted themselves that the fault lay in the implementation, not the strategy; governments needed simply to accelerate market liberalization and get the sequencing right. Proponents also took comfort from the volatility of the expanding capital flows. It meant that the financial markets were doing double duty. They were not merely allocating more global resources in efficiency enhancing directions, but were also moving the liberalization process along by rewarding “sound” policies with capital inflows and punishing “unsound” policies with capital flight.

However, long before the current international crisis broke out, “sound” policies began losing substance. In the so-called “first-generation” of crisis models, capital flight occurs because the government is trying to sustain excess aggregate demand that is spilling over into a growing import surplus, by using capital controls to protect an increasingly overvalued exchange rate. Financial capital, recognizing the fragility of the effort, begins exiting the currency through evasive channels. This drains official reserves, which opens the floodgates for an all-out speculative attack [Krugman 1979]. Eliminating excess demand by tighter monetary-fiscal policies and lifting capital controls would allow the exchange rate to settle at a speculation-free equilibrium. These measures formed the core of the “sound” policy set on which the IMF conditioned its credits. But in the context of open capital markets, floating rates had undesirable feedbacks on the price level and on capital flows. Latin American countries, beset by near hyper-inflation in the aftermath of their 1980s debt crisis, shifted, with IMF acquiescence, to pegging or semi-pegging the nominal exchange rate to anchor the price level, which meant overvaluing the real rate, that is, “getting prices wrong.”

Encouraging larger capital inflows—a major desideratum of the IMF—reinforced its acceptance of pegging the nominal exchange rate. The IMF continues to insist on “sound” exchange rate policy, but in the past decade it has been “talking the talk” without being sure which way to “walk.”

Balancing the budget, and raising interest rates, other major components of the “sound” policy package, have also been sandbagged by events. The speculative attack which broke up the semi-fixed Exchange Rate Mechanism (ERM) of the European Monetary System in 1992-93 succeeded in forcing devaluation on countries that had neither an unduly large current account nor fiscal deficit [Eichengreen and Wyplosz, 1993]. The event popularized “second generation” multiple equilibria models among academic economists, in which governments give in and reward the currency speculators with a depreciated exchange rate that reduces economic welfare because the economic and political costs of defending the existing rate against the speculative onslaught have become too high.3

The IMF, however, persisted resolutely in making monetary-fiscal austerity the centerpiece of its “sound” policy set through the first year of the Asian crisis. Since then, under attack from a growing segment of mainstream economists for needlessly worsening the Asian crisis, and fearing political upheavals, the persistence has become less resolute.

In Thailand, Indonesia, and Korea, the IMF eased up in the second year and allowed substantial fiscal deficits in order to reverse declining aggregate demand, though that reflects a tactical adjustment rather than a doctrinal epiphany.4 The current bailout packet for Brazil is conditioned on fiscal austerity and higher interest rates.

The essence of the criticism of the IMF, is echt Minsky FIH [Kregel, 1998], although most mainstream defectors dare not mention the name. The IMF has been severely worsening matters by applying “first generation” corrective policies—high interest rates and fiscal austerity—to situations where the immediate need was to minimize debt deflation by sustaining liquidity and aggregate demand and getting creditors to roll over loans and extend debt servicing while most of the indebted domestic firms and banks still had positive present value. Instead, the IMF policies produced interest rate spikes, credit crunches, and collapsing aggregate demand that maximized debt deflation, forcing a high proportion of the domestic firms and banks to become Ponzi units, i.e. insolvent.

With the Asian crises worsening Japan’s and spreading to other regions, “there is, in short, a definite whiff of the 1930s in the air.” [Krugman 1999; p.58]. “It” may indeed be happening again. Krugman’s recent essay is especially interesting because his assessment of, and policy prescriptions for, the unfolding crisis, Minskyish in all but name, are at odds, as he candidly admits, with the neo-classical-Keynesian synthesis to which he still adheres. It raises again the question, if the policies are appropriate does it matter if the theory is not?

Again the answer is yes. Krugman sees the 1990s “It” as merely another anomaly rather than a systemic phenomenon. Emergency measures are required: developing countries should adopt capital controls; Japan, caught in a liquidity trap, should try harder to inflate; other industrial countries should avoid the liquidity trap and minimize debt deflation by reorienting monetary policy to low inflation rather than price level stability.

But the long-run still belongs to the neoclassical-Keynesian synthesis plus the Philips Curve, although with free capital mobility also a long-run desideratum, the “impossible trinity” limits the feasible exchange rate choices to either floating or forming currency unions within optimum currency areas. Thus while Krugman’s prescription for the current crisis is heterodox, his perspective on longer-term reform of the “architecture” of the international financial system in order to minimize the recurrence of future “Its” remains largely shaped by orthodox notions about capital market dynamics that are at odds with the FIH and its policy implications.

A fundamental implication of the FIH is that without restrictions on capital market dynamics neither exchange rate choice is a barrier against crises. Minsky, however, placed his FIH theorizing and policy implications in a closed economy setting.

Does free capital mobility reinforce or undermine its insights? I contend that it reinforces the relevance of the FIH, but weakens the relevance of the major policy inferences that Minsky drew from it. Nevertheless, a weaker set of stabilizing policies compatible with the FIH may be technically and politically feasible, despite constraints of national sovereignty and the heterogeneity of the world economy. The remainder of this paper elaborates on these contentions.

The Financial Instability Hypothesis vs. the Efficient Market Hypothesis in a World of Open Capital Accounts

At first glance, a world of open capital accounts appears to undermine the relevance of the FIH. Unless all countries are simultaneously in the fragile phase of their domestic FIH, those in that phase should by raising interest rates sufficiently be able to abort incipient credit crunches and debt deflation by drawing in capital flows from countries in the more robust phase of the FIH. But the FIH also holds that the fragile phase is the outcome of increasing leveraging by both borrowing firms and lending banks, and ebullient overvaluation of capital assets by the equity markets which deteriorates the quality of loan collateral. The liquidity squeeze that ensues and brings on a financial crisis is due to a sharp upward reassessment of lender risks. An inflow of
foreign finance that aborts the crisis therefore implies that foreign lenders disregard this reassessment.

The case for opening capital accounts globally rests on micro-foundations that validate such disregard. The inflows are normal responses because financial markets, absent regulatory distortions, behave efficiently. They are composed of rational wealth maximizing entities who therefore strive to process correctly all available information about the fundamental factors that determine the yields and risks of loans and of the
capital assets that collateralize the loans. Lenders operating in a lower interest rate environment will always be attracted to higher interest borrowers, provided the interest spread is high enough to incorporate the lender’s correctly assessed risk premium.

Lifting capital controls merely extends these efficient market dynamics to the global economy. The FIH is inapplicable not only to open economy financial relations but to closed economy ones as well.

Both the FIH and the EMH are simplified approximations intended to highlight the essentials of complex dynamic processes and to inform policy. The EMH, however, has been forced to attach successive ad hoc qualifications, Ptolemaic fashion, to its core premises and associated policies in order to protect them from falsifying events. On the other hand, while the FIH in its current state falls short of adequately explicating open economy financial dynamics, it can be readily improved without abandoning its basic structure.

Thus from the EMH perspective the rapid expansion of portfolio and direct capital flows accompanying the decontrol of the OECD capital markets must have represented a major transfer of real resources to more efficient uses. Yet Martin Feldstein and associates have convincingly shown that the high correlation between domestic savings and investment that prevailed in the OECD countries prior to decontrol declined only negligibly after decontrol [Feldstein 1994]. What have declined precipitously from 1960s rates in all the OECD countries have been the growth rates of labor, capital and total factor productivity of the business sector, and somewhat less precipitously, real GDP growth rates [Felix 1997/98, tables 2, 6]. Such trends patently contradict the improved efficiency claims.

Global forex transactions per trading day have risen from $18 billion in 1977 to $1.5 trillion in 1998, and from 3.5 times the global export of goods and services in 1977mto 60 times in 1998 [Felix 1997/98, table 1; Economic Report of the President 1999, Box 6-1]. The connection between forex flows and trade financing has obviously been attenuating as has the impact of trade imbalances on exchange rates. For a time EMH adherents lauded these developments as efficiency enhancing, since much of the rising forex flows related to greater hedging against exchange risk, and increased opportunities for beneficial arbitraging of asset prices that the opening of capital markets made possible. But the increased hedging demand has been provoked by the greater exchange volatility which the increasing forex flows were producing. The creation of novel hedging instruments by financial houses, moreover, not only spread risks but created new ones by extending the chains of liability commitments linked to the hedging operations.

And since risks can only be hedged incompletely, the financial innovations have expanded opportunities for speculative position-taking as well as for profitable arbitraging, all of which have fed exchange volatility, motivating yet more forex trading.

A decade ago a London banker summarized the dynamic as follows:

A more controversial feature of the new shape of the financial system is that the bulk of its participants now have a vested interest in instability. This is because the advent of the high-technology dealing room has raised the level of fixed costs. High fixed costs imply a high turnover is required for profitability to be achieved.

High turnover tends to occur only when markets are volatile. The analysts at Salomon Brothers…put it clearly. “Logically the most destabilizing environment for an institutional house is a relatively stagnant rate environment” [Walmsley 1988, p.13].

A decade later, a Wall Street risk consultant observes: “When one considers that risk management in the early 1970s consisted almost entirely of the evaluation of credit risk, it is breath-taking to consider the galaxy of risks we track, analyze, and manage today.” The observation is supplemented by a “partial listing” of the galaxy containing 45 different categories of risk [Beder 1997, p.347].

Disconcerting also was the rising incidence of banking and currency crises. An IMF survey reports that during 1980-95 thirty-six of its 181 members had one or more systemic banking crises, and 108 others had one or more periods of “significant banking problems,” defined as “extensive unsoundness short of a crisis” [Lindgren et al. 1996, Annex 1]. These numbers have, of course, risen significantly since 1995. A prominent econometric paper found a strong correlation between the liberalizing of domestic financial markets and the incidence of banking and currency crises [Kaminsky and Reinhart 1996]. The IMF also reports that in a sample of 50 recent currency crises, the cumulative loss of output averaged around 15% of GDP [IMF 1998].

Although the IMF survey reported that three-fourths of the OECD countries had also suffered systemic banking crises or “significant banking problems,” proponents of financial liberalization focused on developing country problems, offering contradictory but equally embarrassingly timed advice on how to integrate successfully with the global financial markets. Following the 1995 Mexican crisis and the ensuing tequila contagion, the World Bank shifted to an evolutionary approach. Its 1997 research report, Private Capital Flows to Developing Countries: the Road to Financial Integration, arrays developing countries along a continuum. At the low end are countries that were early in the process of absorbing capital flows effectively, because they still lacked “a sound macroeconomic policy framework…a sound domestic banking system with an adequate supervisory and regulatory framework, and a well-functioning market, infrastructure and regulatory framework for capital markets.” Developing countries in the early stages should approach foreign capital cautiously, using capital controls to reinforce defenses against sudden surges and withdrawals. Those who have completed the requisites for full financial integration, however, should go for it. Accelerating the movement along this evolutionary path is the increasing skill of international financial markets in assessing developing country payoffs and risks. “Contagion effects of the kind seen after the Mexican crisis are not likely to be long-lasting.” Indeed, “aggregate net private capital flows to developing countries are likely to be sustained in the short to medium term because of the continuing decline in creditworthiness risks and other investment risks, the higher expected returns in developing countries, and the fact that these countries are under weighted in the portfolios of institutional investors [World Bank 1997, pp.2-5,78].

To measure movement along the continuum the report constructed a financial integration index. In 1985-87 only Korea and Malaysia ranked as “highly integrated,” but by 1992-94, 13 developing countries were “highly integrated” and 23 were “medium integrated.”5 However, since three of the highly integrated—Argentina, Mexico and Turkey—had nevertheless suffered major financial crises in the first half of the 1990s, stable financial integration required still other requisites, such as the balanced budgets, high savings rates and export-oriented investment that had enabled the East Asian countries to fend off the “tequila effect” in 1995. Indeed,

The most dynamic emerging [capital] markets, where progress has been particularly intense during the past five years, include most of high-growth Asia (Korea, Malaysia and Thailand, with Indonesia and the Philippines not far behind).

The East Asian markets stand out for their depth and liquidity, and because of efforts undertaken in the 1990s, their infrastructures are now equal to those in Latin America [World Bank 1997, p.59].

Unfortunately for the report’s evolutionary theory, forecasting skills and market timing, all five highly integrated East Asian economies bit the dust as the report reached the bookstores.6 It dropped from sight soon after.The OECD was another victim of mistimed publishing. In contrast to the World Bank, its remedy for the burst of financial crises was to speed up the financial liberalization process.

According to its projections, that would elevate per capita GDP of the “non-OECD world” by 270% by year 2020, compared to only a 100% increase, were the pace not accelerated [OECD 1997]. The report’s optimism relied heavily on the dynamism of the “emerging non-OECD economies…from Asia and Latin America” led by the “Big Five of Brazil, China, India, Indonesia, and Russia” [OECD 1997; preface]
This report, which also appeared as the Asian meltdown was gathering momentum, also faded quickly from circulation.

A recurring obbligato accompanying the crisis-strewn path of financial globalization has been mistaken optimism that improved transparency of information, the successive Basle Accords to tighten prudential bank regulations, and learning-by-doing improvement of lending skills by the lending institutions would stabilize the financial flows. At the 1979 conference on “Financial Crises and the Lender of Last Resort” (papers published as Financial Crises: Theory, History and Policy, Charles P. Kindleberger and Jean-Pierre Laffargue editors, Cambridge U, Press 1982) the paper dealing with rising developing country indebtedness observed optimistically:

Fortunately, the data published by international organizations (BIS, World Bank, IMF), by various national monetary authorities, and by some international banks have been considerably improved in recent years, as part of a deliberate move toward better coverage and understanding of international banking transactions, to help the bankers themselves in decision processes for lending abroad, in particular, in assessing country credit risks….no country has yet been forced into default, and it remains doubtful that this could occur [Metais 1982, pp. 223-225, 232, footnote 11].

Two years later the Third World debt crisis required a concerted bailout to stanch an international banking crisis.

Greater transparency was also the centerpiece of the G-7 response to the 1995 Mexican crisis, which authorized the IMF to establish a Special Data Dissemination Standard that,

“offers countries having, or seeking, access to international capital markets, a voluntary means of providing regular, timely and comprehensive economic data. A key feature of the implementation…will be an electronic bulletin board maintained by the IMF at a World Wide Web site on the Internet” [IMF Survey September 9, 1996, p.290].

Two years later, the Asian crisis led the BIS to observe exasperatedly that “in spite of the ready availability of BIS data showing increasing vulnerability of some of the countries to a sudden withdrawal of short-term international loans, the volume of these loans simply kept on rising” [BIS 1998].

Similarly, each successive Basle Accord to tighten prudential supervision has been a reaction to near global financial crises that exposed deficiencies of the previous accords. The deficiencies reflect the dark side of the skill-enhancing learning process. It has enabled the supervised banks to devise evasive innovations that keep the Basle Committee on Banking Supervision behind the curve.

In reacting to these “anomalies” academic economists have followed two contrary paths. The new open macroeconomics of the 1980s extends the prevailing mainstream obsession with the need to anchor macroeconomics on firm neoclassical “microfoundations” to international trade and finance. The “law” of one price, purchasing power parity and the EMH should prevail in the medium-term, because with the world economy moving ever more closely to free trade and free capital mobility, rational maximizing agents were offered increasing scope for taking positions based on “sound fundamentals.” This implies that relatively stable real exchange rates should prevail.

The other path has been to test these premises and conclusions empirically. These tests, conducted mostly on data from the industrialized countries, roundly reject the conclusions and most of the premises. In a recent survey of the tests, Charles Engel summarizes the results as follows [NBER Reporter Winter 1998/99]:

  1. “The failure of the law of one price accounts for over 90 percent of real exchange rate variations. In many cases it accounts for 98 to 99 percent of the variation.”7 [p.15]
  2. Purchasing power parity can be teased from very long-term data sets (100 years or more), but for shorter intervals within this span, the effects of different monetary regimes dominate real exchange rate volatility. “Generally, when nominal exchange rates are floating, the transitory component of the real exchange rate is highly volatile; when the exchange rate is fixed, the transitory component is very quiescent.” [p.15]
  3. Short and intermediate-term exchange and interest rate dynamics currently are best explained by the Frankel-Froot model [J. Frankel and K. Froot 1990], in which forex trading is dominated by “chartist speculators who do not evaluate investment opportunities rationally, but instead chase trends.” [p.17].

Yet Engel, who has contributed importantly to this critical testing, is still intimidated enough by the neoclassical microfoundations’s restrictive concept of rational behavior to add this cautionary conclusion:

From the modern (1990s) perspective, the shortcoming of the Frankel-Froot model is that it allows irrational herding behavior by economic agents. Additional serious research is needed to understand whether nonfundamental speculation can really drive short-run behavior of exchange rates [p.17].

An essential step toward developing an alternative Minsky-Keynes open economy macroeconomics is, therefore, to anchor it to a view of rational behavior that’s more appropriate to the behavior of the agents who dominate trading in asset markets. This requires disaggregating position-taking in the organized capital asset markets beyond Minsky’s tripartite hedge, speculative and Ponzi behavior, by elaborating Keynes’ beauty contest metaphor of Chapter 12 of his General Theory. Such markets are dominated by market-timing agents, whose short-term trading, financed by bank credit, provides most of the market liquidity. Position-taking by a rational trader must necessarily be based on assessing short as well as long-term determinants of the movement of asset prices within his trading horizon. It would also be irrational for him to assume that his assessment of each determinant, and his trading horizon, are identical to those of other traders. His trading response to news affecting fundamental determinants requires, therefore, that he also assess the likely response of other traders, in the knowledge that those responses also include an assessment of how he will respond.

Since a priori deductions of the state of other traders’ expectations involves an infinite regress into subjectivity, rational traders must resort primarily to inductive reasoning. There is no way for them to validate their expectational hypotheses other than by applying them and observing the results. Inductive reasoning is a rational decision process that precludes maximizing decision making. Heterogeneous traders inductively arriving at a common set of expectations would be a special case, based not on reaching general consensus on the “true model” of how fundamentals determine equilibrium prices, but on a confluence of judgments about likely reactions of traders to news about variables that impact short and long-term expectations, Such equilibria are likely to be unstable, producing asset price bubbles and crashes.

The conditions for an expectational equilibrium to emerge among heterogeneous traders is being explored through non-linear dynamic (chaos theory) modeling.

Mimicking markets made up of heterogeneous traders with varying beliefs and feedbacks requires models that are too complex for determinate solutions, but allow numerical experimentation. Brian Arthur and his Santa Fe Institute colleagues report the following results of their experiments [Arthur et al 1997]:8

We find that if our agents very slowly adapt their forecast to new observations of the market’s behavior, the market converges on a rational expectations regime. Here ‘mutant’ expectations cannot get a profitable footing….Trading volume remains low. The efficient market theory prevails.

If, on the other hand, we allow the traders to adapt to new market observations at
a more realistic rate, heterogeneous beliefs persist, and the market self-organizes into a complex regime. A rich ‘market psychology’—a rich set of expectations—becomes
observable. Technical trading emerges as a profitable activity, and temporary
bubbles and crashes occur from time to time. Trading volume is high, with times of
quiescence alternating with times of intense market activity. The price time series
shows persistence in volatility…and in trading volume….individual behavior evolves
continually and does not settle down [p.301].

An expectational equilibrium, it must be emphasized, merely means a convergence of trader expectations about asset prices. The inference that they are guides to the optimal allocation of resources in the real economy would be unwarranted. George Soros’ concept of reflexivity similarly stresses the self-referential formation of financial market expectations in his critique of the EMH [Soros 1994]. The inference that is warranted is that the neoclassical microfoundations are a poor basis on which to erect macroeconomic theory, whether open or closed.

The FIH gives direction to the above taxonomy. Financial markets become progressively more active during self-reinforcing runs of optimistic expectations,
sustained by the increasing willingness of banks to fund leveraged position-taking by
speculating traders. But the effect on new investment and credit risk according to the closed economy FIH has to be broadened in an open economy version to incorporate
exchange rate and other risks generated by free capital mobility, because these impact not merely the level but also the composition of investment, That is, the increasing volatility of interest and exchange rates raises the hurdle rate, which tilts investible funds toward projects with faster expected payoffs.9 Perceptions of credit risk may continue to decline, but a rising hurdle rate will concurrently steer investible funds toward shorter gestation projects: toward mergers and acquisitions rather than greenfield construction, and toward increasing “stockholder value” via share buybacks, and speculative financial forays. The declining growth rates of productivity and real GDP in the OECD countries that have accompanied the shift to floating exchange rates and the lifting of capital controls appear to reflect this dynamic.

Thus an increasing share of resources has been drawn to activities that supply liquidity and transfer ownership and risk. From the mid-1950s on, the share of GDP in each of the G-7 countries devoted to Finance, Insurance, and Real Estate (FIRE) has risen almost monotonically. Until the mid-1970s, the rising FIRE/GDP ratios were paralleled by rising real growth rates of non-financial goods and services, supporting the conventional view that financial deepening promotes real growth. Since then, however, the real growth of the non-financial sectors of each of the G-7 has fallen off even more than has real GDP growth, suggesting that the post-Bretton Woods rise of FIRE/GDP has been crowding out non-financial growth [Felix 1996; Charts 1-7]. Other data show that the share of the OECD labor force employed in finance proper rose 21% higher and the share of OECD investment in finance rose 104% higher in 1980-93 over their 1970-79 averages [Edey and Hviding 1995; Table 2]. Since 1975 financial services has been the fastest growing component of international trade, rising at 13% per annum, while FDI in financial facilities led the overall growth of FDI in services during the 1980s [OECD 1994, pp.38-40].

In sum, the claim that major welfare gains have ensued for both the industrial and developing countries from decontrolling capital markets has been, in Bhagwati’s trenchant phrase, “banner waving.” [Bhagwati 1998]. Instead of citing empirical support that such gains have ensued, the claimants have been tautologically trumpeting their theoretical claims as a posteriori proof.10

The most vulnerable participants in the globalizing financial system, the developing countries with their thin financial markets and more limited technological and managerial flexibility, have tried to strengthen defenses against currency runs by building up forex reserves. In 1997 they held 55% of global official reserves while doing less than 25% of global trade. With the dollar as the chief vehicle currency for trade and capital flight, a complex but unstable symbiosis has emerged between the U.S., the developing countries, and the rest of the OECD. Thus far it has benefited the U.S. economy at the expense of the others, but its dynamics include adverse feedbacks that are likely over time to erode the U.S. gains.

The U.S. benefits to date extend well beyond seignorage gains, which most estimates put at between 0.5 and 1.0 percent of U.S. GDP.11 The collective response of developing countries to their contagious currency crises has been to increase their desired reserve levels and to try to reach these levels by intensifying their exporting to the industrial countries, which has been deflating prices for imported consumer goods and industrial materials. However, because of the premier position of its currency, the U.S. has been able to export the dollar at will in exchange for these imports, i.e., run increasing trade deficits without being forced to raise its short-term interest rate to deter capital flight. Were more developing countries to shift in desperation to currency boards or, as in the case of Argentina, from currency board to complete dollarization, they would be further increasing the capacity of the U.S. to fund rising trade deficits. That is, the incessant demand for more dollar reserves by developing countries to protect against currency crises keeps overriding the corrective mechanism of conventional analysis, in which increasing foreign liabilities should limit the size of U.S. trade deficits, because foreign holders become unwilling to hold more dollars except at higher dollar interest rates. The other industrial countries, on the other hand, while benefiting from the improved terms of trade, have had to pay for their cheapened imports with exports and higher short term real interest rates.12

The dark side for the U.S. is that its dollar exporting is deepening a “Dutch disease” dilemma. U.S. residents whose income and wealth comes from ownership of financial assets, or who are employed in skilled positions in the non-traded goods sector, have garnered the lion’s share of the benefits. Those in the traded goods sector, on the other hand, have suffered losses of high productivity manufacturing and primary sector positions and an out-migration of labor to low wage service sector jobs. The result is a
resurgence of Wall Street-Main Street tensions over monetary and trade policy with interesting implications for the current debates over reforming the “architecture” of the global financial system.

Also threatening the favorable U.S. dynamics is the emergence of the euro as a potentially major alternative vehicle currency, and the diverging positions between the U.S. and most of the other G-7 on financial crisis management. Washington is encountering increased difficulty getting the other G-7 countries to keep contributing to the IMF bailouts and to acquiesce to its hands-off position on floating exchange rates and
free capital mobility.

Finally, the industrialized countries, most of all the U.S., have been basking in asset price trends that, as per the FIH, appear unsustainable. Since 1982 real interest rates on 10-year government bonds of each of the G-7 have averaged around twice their Bretton Woods averages [Felix 1997/98: Table 7]. Capital decontrol appears to account for most of the difference. That is, in the Bretton Woods era, when capital controls were
in place in most of the G-7, the only easy options open to holders of long bonds anticipating inflation from a credit-easing policy, were to shift to shorter-term bonds or to equities. Both moves tended to reinforce the policy goal of bringing output and employment closer to capacity. But with the capital decontrol of the 1980s, quick, easy movements by institutional investors between domestic and foreign bonds and equities,
and covered and uncovered interest arbitraging by banks and hedge funds, countered efforts to lower real interest rates, short and long. The U.S. has been only a partial exception. The reserve currency dominance of the dollar has allowed the Fed greater scope for lowering short-term real interest rates than has been permitted other G-7 central banks, but that advantage has not extended to long-term real rates.

The high long-term real rates presage a deepening of the current globalizing crisis. From the early 1980s on, they have been exceeding GDP growth rates by a rising percentage in each of the G-7. In the past decade, interest rates on 10-year governments have averaged more than double the GDP growth rates. The only historic parallel for this is the inter-war era, with the depressed 1930s accounting for most of the GDP growth shortfall. By contrast, during the pre-WWI Gold Standard era real interest and real GDP growth rates were equivalent [Felix 1997/98: Table 9]. With debt expanding faster than GDP since the early 1980s, the rentier share of G-7 income has been rising persistently.

High real interest rates should deter investment, but they have merely held back real not financial investment, as is evidenced by the explosive growth of M & A and equity prices. Capital’s overall share of national income has thus been rising, and since bonds and equities are mostly held by the top income decile, household income and wealth concentration has also been rising. Capital’s share can’t reach 100%. But stabilizing speculation seems far less likely to bring about a smooth asymptotic leveling of the share than are collapsing asset bubbles and political backlashes to terminate this open economy manifestation of the FIH in a hard landing, approximating–hopefully not too closely–that which terminated the 1920s asset price boom.

Reforming the “Architecture” of the Global Financial System

So is it adios EMH and bienvenido FIH? Not quite. The need to reform the “architecture” is now generally acknowledged, as is the need to reduce the volatility of short-term capital flows and the excessive reliance of developing countries on short-term external financing. But EMH thinking still imbues mainstream reform proposals, while Minsky’s closed economy policy advice for thwarting financial crises needs adaptation toopen economy conditions.

Washington and the IMF now include proposals to improve risk assessing by the major financial markets and to improve bank supervision, along with a litany of reforms directed at developing country financial management [Cf. Group of 22 Reports 1998].

They have also quietly suspended their twin crusades to universalize the adoption of capital decontrol and the Mutual Agreement on Investment (MAI). However, the premise that the freedom of capital to move globally is a major public good remains intact. The intent is to resume the two campaigns when the current crisis has subsided.

The proposals for improving risk assessing and bank regulation single out the same targets—inadequate information and transparency, better value-at-risk bank procedures— that successive architectural reforms since the first Basle Accord have aimed at. That this time they’ll finally get it right presumes that the EMH can finally be validated.

The proposals, however, bring to mind the old vaudeville interchange between two drunks fighting off imaginary leprechauns. “Close the door! They’re comin’ through the window! Close the window! They’re comin’ through the door!” That is, proposals to reduce excessive risk-taking by banks and institutional investors would increase contagion, while those that might reduce contagion would increase bank and
investor risk.

The value-at-risk (VAR) models used by banks to lessen the riskiness of their proprietary trading, hedge fund financing, and customized derivative mongering, are charged with not only encouraging excessive risk-taking by the banks, but also with intensifying contagion effects [Cf. Folkerts-Landau and Garber 1998]. By relying on backward-looking variance-covariance matrices and normal risk distributions they tended to underestimate the probability of large losses from taking long and short asset positions (the flaw that bankrupted the Long Term Asset Management hedge fund). Contagion was intensified because a volatility event in one country automatically generated an upward re-estimate of credit and market risk in a correlated country, which triggered automatic margin calls and tightening of credit lines in both countries. Such risk control methods help explain why Malaysia’s capital controls and Russia’s default produced a widespread cutoff of lending to developing countries. Tightening VAR methodology to lower risk-taking by banks is likely to strengthen contagious reactions.

Bond rating agencies are also caught between conflicting goals. They have been criticized for down-grading Asian bonds too late to alert investors pre-crisis, and then for “reactive downgrading of Asian sovereign ratings from investment grade to ‘junk status,’ [which] reinforced the region’s crisis…by forcing institutional investors who are required to maintain investment-grade portfolios to offload Asian assets. In response the rating agencies, having begun downgrading Latin American assets because of contagion risks rather than solely because of deteriorating fundamentals, are being accused of thereby reinforcing global crisis contagion” [Reisen 1998, p.19].

Conversely, a recent OECD policy brief [Reisen 1998] offers two proposals to reduce contagion that would surely increase investor risk. One is to remove investment grade requirements for pension funds and other bond-holding institutions and force them “to rely on their own judgment, rather than moving like herds on rating signals.” The other attacks the 1988 Basle Accords for assigning only a 20% risk-weight to bank loans of less than a year, and a 100% risk-weight to longer-term loans. This biases banks to lend short-term to developing countries and to engage in excessive inter-bank lending.

The policy brief proposes removing the “distortion” by equalizing the risk-weights. But the weights were designed to correct the excessive maturity mismatching between their short-term liabilities and the medium-term loans to developing countries that had brought major international banks to near insolvency in the early 1980s debt crisis; which proves that in finance one man’s “distortion” is another’s “correction.”

Improving risk assessment by requiring more timely and accurate data about foreign borrowers is another proposal that’s unlikely to prevent herd behavior by lenders.

Prior to the Asian crisis, “in spite of the ready availability of BIS data showing increasing vulnerability of some of the countries to a sudden withdrawal of short-term international bank loans, the volume of these loans simply kept rising” [BIS 1998]. This was in part because banks were securitizing their loans and then marketing the securitized bonds, shifting the credit risk to the bondholders. Securitizing also removed loans from bank balance sheets, enabling them to evade the risk-equity requirements of the 1988 Basle Accords and leverage a larger volume of loans from their equity. But diverse bondholders are more prone to herd behavior than are large banks. As Wall Street economist John Lipsky observes, “in a world of mobile, securitized capital, there is little likelihood that the IMF staff will be able to construct a credible stabilization program, including the needed structural reforms under crisis conditions in a matter of days” [Lipsky 1998].

Thus when market nervousness sets in, the timely publicizing of negative information is likely to exacerbate panicky withdrawal and contagion. Fear of such a reaction dissuaded the U.S. Treasury and the Fed from publicizing their adverse assessments of Mexico’s financial health until after the crisis broke out [Wessel et al. 1995].

All this fits the FIH view that financial market dynamics are inherently too unstable to be left alone after a one-time fix. Minsky, however, couched his stabilization advice in a closed economy setting. He assumed a single central bank that could effectively intervene as lender of last resort (LOLR) and a large public sector with a progressive tax structure and expenditure commitments that would allow automatic fiscal stabilizers to set a high floor under aggregate demand. His “anti-laissez-faire theorem,” an in-your-face rejection of the EMH’s contention that “policy surprises” are the main destabilizers of market behavior, also requires an activist government able to impose timely new “thwarting mechanisms.” [Ferri and Minsky 1992].13 Adapting these apercus to a global setting of decontrolled financial markets with no global LOLR, and national economies with varying policy goals, is, however, a complex exercise in political economy. Barry Eichengreen splits the current spate of architectural reform proposals in two groups: those that are “singularly unrealistic” and those that are “singularly unambitious.” In the first group he places—justifiably in my view—proposals for an international central bank to act as global prudential overseer and LOLR, an international bankruptcy court to settle debt conflicts, and other visionary schemes that demand
massive institutional and political transformations to become feasible. In the second group he puts mainstream proposals, such as cited above.

Escaping this depressing taxonomy, however, may be collective action shaped by the FIH, for a minimalist reprise of Bretton Woods. Recall that the Bretton Woods system was able to reconcile national and global stability needs fairly well for a quartercentury, facilitating, by most welfare criteria, “the Golden Age of Capitalism.” The conditions that accounted for its success—capital controls, a United States with the capacity to act as LOLR to the capitalist world, and Cold War anti-Communism as a motivating ideology—have since dissipated. But a modest approximation of Bretton Woods compatible with today’s changed conditions is technically, and may be becoming politically, feasible. The approximation requires implementing two interrelated reforms of the global financial architecture. One is a Big Three agreement to reduce exchange rate volatility by bounding the cross-rates between the dollar, euro and yen within a target
zone, with the other economies left free to tie their currencies tightly or loosely as they see fit to one of the three reserve currencies. The second, directed at weakening the capacity of financial markets to break up band arrangements, is a collective agreement to tax global forex transactions along the lines of the Tobin tax proposal.

Bounding the Big Three currency fluctuations provides a looser equivalent of the fixed dollar-gold price that had anchored the Bretton Woods adjustable peg system. To be effective, the Big Three would have to intervene jointly in the forex market to keep exchange rate fluctuations within the target zone. With open capital markets they would also have to subordinate other monetary-fiscal policy goals to the task. But the ease with which rampaging capital flows broke up the 1987 Louvre target zone agreement and the
ERM makes clear that protecting a Big Three target zone from such rampages is essential. A global Tobin tax could not only perform this task, but could also substantially reduce the collective coordination of monetary-fiscal policies required to sustain the target zone.

Tobin’s proposal for an international agreement to tax forex transactions at a small, uniform rate offers a “market friendly” way of deterring capital market rampages.

Instead of pointy or round-headed bureacrats trying to screen out hot money flows under a direct capital controls system, the tax leaves the screening to the markets. Around 80% of the $1.5 trillion global forex transactions per trading day are legs of round trips of a week or less. Most relate to arbitraging and open speculating by currency dealing banks, investment houses, hedge funds and multinational corporations, seeking to profit by taking large short-term positions to exploit small, transitory margins. A small tax on all
forex transactions would cut heavily into these margins and return on capital. It would impact negligibly the return on capital from international trade and FDI, since these involve much longer round trips and much higher profit margins per round trip.

Moreover, the tax on trade and FDI forex transacting would be compensated by reduced exchange risk and hedging needs attendant on more stable Big Three cross-rates.

The tax would help stabilize exchange rates in two additional ways. The tax revenue would substantially increase the resources available to the monetary authorities to counter-speculate in the forex markets. And reducing currency arbitraging would lessen the macro-policy coordination needed to sustain the target zone arrangement. The last is because the tax widens the interest rate differentials across currencies required to make arbitraging profitable. Indeed, the increased scope that the tax would provide national economies to implement full employment and other welfare goals without being immediately sandbagged by anticipatory capital flight is what originally motivated Tobin to propose the tax. By slowing the reaction speed of the globalized financial markets, the tax would allow welfare oriented policies more time to manifest results.
The tax effects vary non-linearly with the size of the tax, the response elasticities, and enforcement leakages. A recent set of conference papers sponsored by the United Nations Development Programme (UNDP) produced some converging of views concerning each of these three effects [Ul Haque et al. eds.1996]

  1. A tax of 0.1% on global forex transactions applied to the 1998 volume would produce between $180 and $220 billion revenue per annum, and a one-time drop of forex volume of from 13% to 49%, the variation reflecting different assumptions about pretax transaction costs and response elasticities.14 Almost all would impact short-term trading. For arbitraging strategies involving round trips each trading day the annualized tax would be 48%, while for international trade involving a 90 day financial trip, the annualized tax would be 0.8%
  2. Universal agreement would not be necessary to implement the tax. The U.K., the U.S., Euroland and Japan account for around 80% of global forex turnover. Bringing in Switzerland, Singapore and Hong Kong would raise the coverage to 91%. The remaining countries could be brought on board in one fell swoop by making joining a prerequisite for IMF loans.
  3. The tax should be levied on forwards and swaps as well as spot transactions, but how to tax customized derivatives effectively remains to be answered.
  4. To minimize offshore evasion, the tax should be levied at dealing rather than booking or settlement sites. Global forex dealing is dominated by a few dozen large financial houses, most of them headquartered in London and the Big Three. Their dealing rooms employ expensive equipment and talent. Moving dealing rooms as distinct from booking or settlement offices to tax free sites would be very costly. Doubling the tax when one of the counterparty is domiciled in a tax free location would be an effective deterrent. At least two financial houses would then have to move their expensive dealing operations concurrently to tax-free sites for evasion through relocation to work [Cf. Kenen 1996].
  5. Applying the tax to all instruments that have liquid, high volume markets, such as cross-currency treasury bill swaps, would minimize the payoff from shifting to nontaxed instruments. But since “financial engineers” would doubtless try to devise synthetic instruments to fit the bill, the tax agreement would need a supervisory body to oversee tax implementation and to recommend new “thwarting” changes as needed [Garber 1996; Kenen 1996]. However, gaming between financial authorities and financial innovators also plague the conventional proposals to improve the “architecture” of the global financial system, so is no basis for a priori dismissal of the Tobin tax.
  6. Because the tax would be collected by national tax authorities, the size of the tax revenue collected by the participating nations would differ enormously. The collective agreement to tax would also have to include an understanding on the allocation of the revenue. How much should be centralized? How much of the central fund should be devoted to a global LOLR function, and how much for projects in the developing countries, are distributive issues that the negotiators of the agreement would have to address.
  7. Finally, while the tax is primarily a crisis deterring device, allowing member countries individually or in concert to raise the tax rate above the uniform rate when under siege, could ameliorate crises by impeding capital flight and contagion, and with less reliance on interest rate spiking and demand-depressing measures to allay the currency runs.

Opposition from Washington renders nil the immediate prospects that reforms along the lines of this minimalist reprise of Bretton Woods will be taken up at the IMF, the G-7, or other official policy forums. The attempt by France, Germany and Japan to put a Big Three target zone proposal on the agenda of the recent G-7 ministerial meeting in Bonn was slapped down peremptorily by the U.S. delegation. The Tobin tax hovers like Banquo’s ghost over the G-7 and IMF conference tables. Indeed, Washington even suppressed the attempt by the UNDP to promote its aforementioned volume of conference papers on the tax [Le Monde Diplomatique, February 1997, “Le projet de taxe Tobin, bete noire”].

Political dynamics could, however, improve the medium-term prospects for the two proposals. The heightened priority that Euroland governments are giving to job creation while protecting the welfare state, will require protecting the euro against currency runs. Despite Washington’s opposition, European pressure for collective action to bound the Big Three cross rates is therefore likely to persist. While still off the table at
the governmental level the Tobin tax is, surprisingly, picking up grass roots support. A coalition of NGOs, academics and unions have succeeded in getting the Canadian House of Commons on March 23 to pass a bill by a 2 to 1 majority stating “That in the opinion of the House, the government should enact a tax on financial transactions in concert with the international community.” ATTAC, a movement of similar composition, has been gathering considerable support in France, and is spawning sister movements in other
Euroland countries.

 Economic logic, if not grass roots pressure, is pushing in a like direction in Japan. With its short-term interest rate locked in a liquidity trap, the government has been attempting to revive aggregate demand by monetizing a very sizeable increase of its fiscal deficit. The effort is threatened, however, by a flight from longer-term bonds that’s pushing up longer rates and increasing exchange rate volatility. The higher long rates depress aggregate demand directly and further weaken the fragile balance sheets of Japanese banks, while volatile exchange rate movements could heighten trade tension with the U.S. and even force Asian countries into another round of devaluation. Hence Japan’s support for bounding the Big Three cross rates remains strong, with Finance Minister Miyazawa almost dropping the second shoe by announcing his support for “market friendly” regulation of capital flows. [Reuters dispatch, March 1, 1999].

No comparable grass roots Tobin tax movement is yet evident in the U.S. But the persisting global crisis and the U.S. role of global consumer of last resort is reviving Main Street-Wall Street tensions. A widening array of import-competing activities with political clout is demanding import protection. Washington’s attempt to ride both its high horses—free trade and free capital mobility—is becoming politically precarious.

Concern that the momentum is with Main Street is evoking fearful memories of Smoot-Hawley among academic and media pundits. Will this persuade Washington to accept constraints on Wall Street in order to save free trade, or will it fall between the two steeds trying to accommodate both? Given the current level of Washington statesmanship, the odds favor the second. They could, however, shift to the first, were more mainstream economists to give up their addiction to the EMH, thereby depriving the case for free capital mobility of its intellectual cover.

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  1. Article VI is, however, a watered-down version of the original British draft proposal, which called for recipient countries to assist in the repatriation of illicit flight capital. The proposal was favored initially by the U.S. mission, but Wall Street-Treasury opposition forced the U.S. mission to pressure the British to accept a compromise excluding the collaboration requirement. This became Article VI. [Helleiner 1994].
  2. The canonical article was, of course, Milton Friedman’s “The Case for Flexible Exchange Rates,” Essays in Positive Economics” [Friedman,1953].
  3. Maurice Obstfeld, “Rational and Self-Fulfilling Balance of Payments Crises,” American EconomicReview, Vol. 76 (May, 1986), is a prescient precursor of such models.
  4. This is the thrust of IMF-Supported Programs in Indonesia, Korea and Thailand: A PreliminaryAssessment, by the IMF’s Policy Development and Review Department, and of the interview with Jack 
  5. The index averages a country risk rating, a capital flow/GDP ranking, and a flow composition ranking
    which gives greatest weight to portfolio inflows and bank loans [World Bank 1997, Box 1.1].
  6. It appears to have been intended for broad circulation as a didactic sequal to the World Bank’s East Asian Miracle.
  7. The tests compare the variance of prices of the same goods between countries with the variance of prices between different goods within countries. For a large array of data sets, the between country variance dominates the within country variance.
  8. The experiments consisted of varying parameters of a non-linear model that allows feedbacks to modify trading strategies, and applying it to the Santa Fe’s computerized Artificial Stock Market to generate alternative numerical runs. Embedded in the non-linear model is an expectational equilibrium. But whether the traders converge on it depends on the nature and speed of their reactions to the changing sets of prices, volume, yields, etc., generated by the computer runs.
  9. The hurdle rate is the minimum expected return that induces investment in projects involving front-end
    outlays—that is, fixed costs—and delayed revenue flow. Since information about the time-shape of future costs and revenues become more uncertain the longer the life of the project, delaying the project may reduce risk by allowing more information to be gathered. The hurdle rate of return adds a premium for “waiting” to the cost of capital in investment calculations. The premium is the present value of the expected income stream from postponing the project divided by the expected PV of starting the project now. Greater expected volatility raises the hurdle rate, as in option pricing [Dixit 1992].
  10. Two recent OECD studies are illustrative. One study, on estimating that half the rise of real long-term
    interest rates between the 1970s and 1980s was due to financial market liberalization, concludes that the large increase is a measure of the prior “distortion” that liberalization eliminated [Orr et al. 1995]. The second study acknowledges that whether the declining cost of financial transacting and the increased size and diversity of financial services resulting from financial liberalization has produced welfare gains, “depends on judgments about the value of the financial services being provided, in particular, the extent to which the increased financial activity is viewed as being of economic benefit rather than representing excessive or unnecessary financial churning.” But then without citing any supporting real economy data, the study concludes that the benefits were indeed substantial. The lifting of interest rate controls and “regulation-driven credit rationing” must have improved allocative efficiency by “opening up opportunities for international portfolio diversification” and by removing a distortion, whose importance is indicated by the substantial increase of the margin between interbank and bank-customer lending rates in the OECD countries after 1980 [Edy and Hviding 1995].
  11. The following points have benefited greatly from a personal communique from Dr. Srinivas
    Thiruvadanthai.
  12. The real short-term interest rates of all the G-7 except the U.S. and Japan have risen since the mid 1980s to far above their 1960s averages [Felix 1997/98; Table 8]. The Japanese exception is associated with its prolonged depression; whereas the U.S. exception coincides with its relatively prosperity.
  13. “Where the internal dynamics imply instability, a semblance of stability can be achieved or sustained by
    introducing conventions, constraints, and interventions into the environment. The conventions imply that variables take on values other than those which market forces would have generated: the constraints and interventions impose new initial conditions or affect parameters so that individual and market behavior change” [Ferri and Minsky 1992, pp. 20-21].
  14. The ranges are from estimates by Ranjit Sau and me, and are based on applying a simple model to 1995 forex data, using different transaction costs and elasticity assumptions [Felix and Sau 1996]. Jeffrey Frankel’s point estimate, using a different methodology obtained $176 billion revenue and a 45% reduction of volume from a 0.1% tax [Frankel 1996]. The original ranges, computed from 1995 forex data, are increased by 22% in this paper to take account of the higher forex volume in 1998..