Monday, June 28, 2010

Getting Our Financial House in Order

Countries, like individuals, need to work hard on getting and keeping their finances in order. Otherwise it can have a negative impact on their population as well as the country itself. As most of us know, one of the reasons for our recent national financial crisis, from which we're still recovering, including the high unemployment rate, and the huge number of unfortunate home foreclosures we're currently experiencing in many parts of the country, is that a large number of Americans were living well beyond their means.

They were purchasing more expensive homes than they could afford, they were borrowing too much on their home equity, and they were using credit cards excessively, not paying enough attention to the very high interest rates they were paying on their card balances. Of course, it's correct that banks and other financial institutions were improperly facilitating this imprudent and dangerous behavior, and our regulatory agencies were not monitoring all this activity the way they should have.

Right now, as widely reported in the media, a number of countries have gotten themselves into serious financial conditions as a result of both the worldwide economic crisis and risky and careless financial policies over the past many years. They include many European countries, including, among others, Greece, Ireland, Iceland, Italy and Spain, but also the U. S. and Japan. Other countries faring poorly, and even possible bankruptcy, include such as Pakistan, Ukraine, Kazakhstan, and Argentina. Some countries are still doing remarkably well for varying reasons. Most prominent of these is China, and others include certainly Brazil, as well as smaller countries like Romania, Norway and Denmark.

Why is it highly important for a country to be in good financial shape and what are possible consequences of being in poor shape? It's important because, among other reasons, it can have a substantial affect on the country's ability to provide needed services to its people, on their ability to provide jobs for people in the public sector, and for the country's ability to play a constructive role in the world, working together with other nations. Possible consequences are that the country may have to go into bankruptcy, may not be able to get needed financial help from financial institutions such as banks, the International Monetary Fund (IMF) and the World Bank. Furthermore, a country's poor financial shape can lead to lower standards of living for their people, especially harming those who are already poor themselves, and this in turn can lead to significant social unrest and widespread protest movements. We don't want to risk going there!

There are many reasons why some countries do poorly and others remarkably well in terms of their financial well-being, and it can be rather complicated to explain. One reason is that countries who do relatively well tend to have very diversified economies with large businesses which are generally well managed. Another reason is that these more successful countries tend also to have very experienced and effective national policy-makers and managers, including those who manage banking systems, the money supply, budgets, and economic advice to the political leaders. An effective, observant private sector media can also be an important factor. However, these factors don't always guarantee good performance, as in the case of the U. S.

How is the financial well-being of a country typically measured? Here is where it can get somewhat complicated. There are many different measurements used. The most common ones include: the level of national economic growth as usually measured by the change in Gross Domestic Product (GDP) after inflation, sometimes viewed on a per capita basis; the level and change over time of the federal Budget Surplus or Deficit; the level of Trade Deficit or Surplus, which is basically the level of net exports compared to net imports; and the level of National Debt (also known as Public Debt) compared to GDP, and the change in this percentage over time.

The U. S.' deteriorating financial position is fairly evident from looking at the above criteria and it looks more worrisome when one looks at economic projections for the next several years. While GDP in China and Brazil, for example, grew significantly in 2009, the U. S.' declined by 2.4%. While our GDP grew in the first quarter of 2010 at a fairly good annual rate of 2.7%, this was due largely to non-recurring factors which will not be in place for the rest of the year. Growth is expected to be very low for the next few years. The U. S. had a huge $1.4 trillion (not billion) federal Budget Deficit last year (fiscal year-end 9/30/09) and it's expected to increase to $1.6 trillion this year (FYE 9/30/10).

We've had a Trade Deficit every year since 1976 and it's getting worse. While it averaged about 3% of GDP since 1980, it has averaged roughly 4-5% of GDP over the last 10-12 years. Our level of Public Debt to GDP has been mostly on a sharply upward and negative trend for many years. While it was a very satisfactory 26% in 1980, it grew to 42% in 1990, and is now at only a marginally satisfactory 61%. Very worrisome, it's going to get much worse. According to the Congressional Budget Office, our Debt to GDP ratio is projected to reach a scary 100% in 2012!! These percentages don't even take into account the huge government debt obligations of the Social Security Trust Fund!

It's very clear we need to get our financial house in order and the Obama Administration and the Congress need to make this a higher priority. Some recognition of the need for meaningful global corrective action came up at the just concluded G-20 talks in Canada. But the agreed actions seem to me to be inadequate, constrained by political differences of opinions on the need for more spending to continue economic recovery versus cutting public debt. The public and the media need to get better informed and concerned about this critical issue. Right now we have a very sensitive specific national vulnerability, as a consequence of our poor financial house. China is a major creditor of the U. S. in that they own 17% of outstanding U. S. Treasury securities, i. e. our Public Debt. If they were to decide that owning these is too risky, although that's not likely, it could pose a big problem for us. Other thoughts, some of which I've discussed in previous posts:

1. We need to move toward a firm balanced federal budget within the next several years and manage our affairs so that is maintained in subsequent years.
2. This will definitely involve more serious prioritization of national needs and making tough political decisions on budget cuts, spending versus debt reduction, infrastructure investments, and a number of tax issues to potentially increase federal revenues. While this will be politically difficult and contentious, it's necessary for the country's well-being.
3. A significant factor on budget cuts will involve military and related expenditures abroad, including those on the costly wars in Iraq and Afghanistan and on maintaining our military bases at over a hundred different properties abroad, especially, aside from those in the Middle East and Central Asia, those in in Korea, Japan, and Germany. Keep in mind that our military spending budget for FYE 2010 is as much as $664 billion! That's larger than the entire GDP of most countries!
4. With respect to taxes we must overhaul and simplify our unnecessarily complex and archaic tax system. This includes the IRS doing a better job in collecting taxes owed by both businesses and individuals, and lowering corporate tax rates, now among the highest in the world, to make us more competitive with foreign firms and induce companies to hire more employees, enabling us to reduce our high unemployment rate and grow GDP of which consumer spending is such a major part.

Thursday, June 24, 2010

Continuing Afghanistan War Concerns

It was unfortunate it became necessary for President Obama to replace General Stanley McChrystal as our top military commander in Afghanistan. General McChrystal was apparently a widely admired senior military officer who had a great career, but now it's likely he will soon retire from public service. However, President Obama was lucky to have highly regarded General David Petraeus available and willing to accept the very difficult job as his replacement. Our mission and military strategies are not expected to change, but the hope and expectation is that General Petraeus will do a more effective job of working with Obama's national security team and the political and military leaders of our coalition allies, several of whom have or are leaning towards withdrawing many or all of their troops.

There are a great many concerns about this war shared by most Americans and I spelled out some of these in my posts published in October and December last year. One of the big ones that still bothers many of us is what specifically our mission is over there, whether or not the war is really winnable, and how winnable is clearly defined. We must assume Obama, Secretary of Defense Gates and most of our military leaders believe definitely it's winnable. My understanding is that a "win" should be defined more or less as a situation where: a) Osama bin Laden and his top deputy, Ayman al-Zawahiri, have been killed or captured with Al Qaeda no longer considered a significant threat; b) the Taliban and related extremists' insurgent activities are greatly contained over the longer run; and c) a relatively stable and democratic Afghan government and its military and police forces can govern most of the country reasonably well, providing needed basic services to its people, and defend the country against any external aggression, largely on their own.

I submit the above definition of a "win", based on what I've heard and read from our leaders over the past year or two, although a day or two ago I heard President Obama state that our goal in Afghanistan "is to reverse the momentum of the Taliban," and I haven't heard so much lately about capturing or killing bin Laden and Zawahiri. I do have a sense that the Administration's defining of our mission or goals has had a tendency to shift a little from time to time. And this does concern me, but perhaps that's inevitable in a drawn-out, dynamic and difficult situation like we find ourselves in.

Based on what we've experienced so far, is a "win" with the above definition really achievable? If so, how long will it take and what will it cost? How likely is it that, once contained, the Taliban will not recruit new fighters and again become a big insurgent threat, after most or all of our troops and those of our coalition partners leave?

Though we've been unable to find and capture or kill bin Laden and Zawahiri after nine long years of trying, I think that's still possible, but we can't be very optimistic about 'b' and 'c,' it seems to me. Why? Almost everyone, including Secretary Gates and Senator Kerry, Chairman of the Senate Foreign Relations Committee, acknowledge that we have challenging issues with President Karzai, some of his cabinet ministers, several of the tribal chiefs, endemic corruption, and senior elements of the military and national security staff in neighboring Pakistan, where a majority of Taliban fighters are still recruited and trained.

As a reminder, the war started on 10/07/01 when we launched our "Operation Enduring Freedom" with British support in response to Al Qaeda's savage and unprovoked attacks on us on 9/11/01. About two weeks ago we marked the 104th month of U. S. military engagement in Afghanistan, and it became the longest war in U. S. history. Its cost to date, based on my research is roughly $280 billion, and recent monthly costs at about $6.5 billion are now outpacing our costs in Iraq. There have been approximately 1,800 coalition fatalities, of which the U. S. has suffered 1,125 and the U. K. over 300. About a dozen other European countries have also had numerous fatalities. Nearly 10,000 coalition soldiers have been wounded, at least 6,355 of whom have been American. These are enormous costs and, of course, unfortunately they go up more or less daily!

Even though we've been fighting with our coalition partners in Afghanistan for about nine years, incurring these very high costs in blood and treasure, President Karzai has recently made it clear he is concerned about the level of our commitment. He is very aware Obama has emphasized the Administration will have a serious review of our action plans in Afghanistan in December this year, based on a report from General Petraeus, and that in July 2011 Obama and his national security team hope to begin a schedule of troop reductions. Although the schedule depends on the conditions on the ground, i. e. how the war is going and how Karzai, his administration and his security forces are performing in governance, providing services, and protecting their citizens, Karzai and his team realize the time is fast approaching that he will need to cope with fewer and fewer U. S. troops and advisors. Of some concern, though understandable from his point of view, he has already made feelers to "moderate" Taliban elements about joining forces with his government.

Obama is in a very tough situation. As many in the media have emphasized, he "owns" this war now, not former president George Bush. His reelection prospects and presidential legacy will most probably be adversely affected if the Afghan war goes badly over the next 12 months, even though realistically he has little control over the outcome. Certainly he will not be reelected in 2012, if he pulls out all our troops between now and July 2011, while the war is going badly, though more and more Americans likely would like to see that happen. Our troops will continue to perform courageously and very well, and I'm confident that Petraeus will work very hard and do the best he possibly can. But Obama is highly dependent on General Petraeus, his staff, how well his national security team works with Petraeus, how well Karzai and his administration perform and cooperate with Petraeus, and, also critical, how well the Pakistani civilian and military leaders perform their responsibilities in fighting the Taliban and other terrorists, and cooperate with Petraeus.

Very regrettably, we must expect significantly higher American and coalition partners casualties over the next several months as Petraeus manages the difficult and dangerous Kandahar campaign against the Taliban and their affiliated insurgents. Reportedly, there are only an estimated 10,000 Taliban fighters in total, with just 2,000 to 3,000 who are fighting full-time and are highly motivated. But in this kind of insurgent war, they will still be difficult to defeat. Unfortunately, we must also expect that our monthly costs for the overall war will also continue to rise between now and the end of the year as the number of our troops in the country increases to close to 100,000 and the Kandahar campaign is pursued.

Americans must hope that the campaign goes very well, our casualties are much lower than we feared, that the Afghan and Pakistani leaders do their jobs surprisingly well, and that General Petraeus will be able to deliver a very positive report to President Obama and Secretary Gates in December, facilitating the prospects for our troop reductions beginning next July.

Tuesday, June 22, 2010

U. S. Troops Needed in Korea and Japan?

Despite the continuing threat posed by the unpredictable, malevolent and largely incompetent leadership in The Democratic People's Republic of Korea (North Korea), a regime probably armed with nuclear weapons, I am among those Americans who increasingly wonder if it's really necessary for the
U. S. to have so many troops stationed in the Republic of Korea (South Korea) and Japan. Among my concerns is how much these deployments are in fact costing us taxpayers. My fear when everything is totaled is it's in the billions, even if the Koreans and Japanese were covering some of the expenses.

As a reminder to my younger readers who may not be familiar with the background, Japan occupied and controlled Korea beginning in 1905, annexing the country five years later. With the defeat of Japan in World War II in 1945, the United Nations developed plans for a trusteeship administration by the Soviet Union and the U. S. However, the plan was soon abandoned and in 1948 new governments were established with a democratic and capitalistic South Korea and a communist dictatorship in North Korea. In June 1950 North Korean forces invaded the south. The U. N., led by U. S.forces, supported South Korea. China, supported by air support from the Soviet Union, backed North Korea. The U. S. had 480,000 troops employed in the Korean War and we suffered nearly 37,000 casualties. Finally, in July 1953 the war ended with the signing of an armistice agreement.

Under the U. S. - South Korea Mutual Defense Treaty signed in 1953, the U. S. agreed to help South Korea defend itself against external aggression. In support of this commitment the U. S. has maintained military personnel in Korea, principally the Army's Second Infantry Division and several Air Force squadrons. The U. S. at present has approximately 29,000 troops in Korea, mostly from the Army and Air Force. South Korea has about 660,000 active troops, the 6th largest force in the world, and 4.5 million in their reserve units. North Korea reportedly has 1.2 million active troops, the 4th largest in the world, plus a reserve force of an estimated 3.5 million members. A positive factor is that agreements are in place to gradually reduce U. S. troop strength, move our forces to bases more south of the border, and transfer operational command to the South Koreans.

Japan's post-war constitution, after their defeat in World War II, still on paper prohibits Japan from maintaining military forces and to conduct any war for settling international disputes. However, Japan can, and does have a potentially potent Self-Defense Force set up in 1954 with an estimated 250,000 members consisting of ground, maritime and air units. The stated purpose of this Force is to preserve peace, public order and Japan's independence and safety, sort of a combined national guard and national police, but solely for domestic missions.

The U. S. has roughly 36,000 troops stationed in Japan under a Treaty of Mutual Cooperation and Security signed in 1960, plus 5,500 civilians employed by the Department of Defense. Most of these are Marines and Air Force personnel. Under the Treaty the U. S. is obliged to defend Japan in close cooperation with the Japanese Self-Defense Forces. The U. S. Air Force has about 150 fighter planes based on two large air bases, one, the Misawa Air Base, is in the far north of the country, and the other, Kadena Air Base, on the southern Japanese island of Okinawa, between Japan and Taiwan.

After having all these U. S. troops stationed in Korea since 1953 and in Japan since 1945, isn't it time to seriously considering whether this is still really necessary, and at a very minimum consider reducing the number substantially and limiting ourselves largely to advisory troops as needed? Clearly this should not happen without careful consultation with the government and military leaders of these two countries. It is also prudent to try to put in place a satisfactory agreement with the other two regional powers, China and Russia, to keep North Korea in check, and have the advance backing of the entire U. N. Security Council. Admittedly this would represent another big challenge for President Obama and Secretary of State Hillary Clinton at a time when their plates are already quite full. But it would be fine if this plan was not activated for a year or two.

Rationale for seriously considering accelerating the reduction, if not elimination, of our military forces in Korea and Japan:

1. They both have sizable diversified and technology advanced economies with their own substantial, in the case of Korea, and potential, armed forces in the case of Japan. After all these decades of training and cooperating with the U. S. troops, they should be able to take care of their own defense.

2. To the extent they are not yet prepared to do this on their own, the U. S. can agree to remain stationed there under an overall agreement with reduced forces for 3-5 more years, focusing on training and logistical support.

3. North Korea is the main threat and it seems to me that China can be convinced to keep them in check, since surely they would be very pleased to have the U. S. move towards terminating our military presence in the region. Consistent with this, one of China's key strategic objectives appears to be doing what it can to preserve peace and stability in the area.

4. Furthermore, recognizing the historical political and social tensions between South Korea and Japan, these countries should have a strong strategic interest in working together to keep North Korea from becoming much more of a threat. There are already significant economic ties between the two countries. Again, there is no doubt that China's peaceful supporting role is critical.

5. The U. S. is currently overextended abroad and has a lot of hard work to do in reducing our national debt and eliminating large budget deficits. With these issues and our substantial domestic investment needs, we can't afford to continue our overseas military force levels and the related civilian employees. We need to cut our costs and we need those jobs more here!

6. With U. S support, and given the stakes involved, I'm sure it's feasible for Japan to amend their constitution as needed to allow the country to develop their Self-Defence Force into a more traditional and potent military, at least over a 5-7 year period.

My guess is that quite a few people will consider my views on this subject very risky and radical. However, at least it ought to stimulate some discussion and debate, and that would be a good thing. In an ideal world a positive catalyst for pursuing my recommendations would be new reformist leadership in North Korea which could recognize what they likely could negotiate in terms of aid and assistance from South Korea, Japan and the U. S. in return for changing their course on nuclear weapons and their frequent aggressive and provocative behavior. But we shouldn't expect that will happen, at least not in the near term.

Monday, June 21, 2010

Foreign Language Ballots

Voting ballots and voter information guides are currently in a large number of voting districts required to be published in a varying number of foreign languages, in addition to English. While probably well intended by its proponents, this is a costly and imprudent practice which should be stopped. All ballots and voter information guides should be in English only! As someone who came to this country with no knowledge of English at all, I consider this a clear no-brainer!

The National Voting Rights Act of 1965, signed into law by President Lyndon Johnson, was primarily intended originally to prohibit states from imposing any voting qualification or prerequisite to voting which would have the effect of denying or abridging the right of any U. S. citizen to vote on the account of race or color. It was especially directed at a number of southern states who had for decades been discriminating against African-American citizens.

The Act established extensive federal oversight of elections management and provided that states with a history of discriminatory voting practices could not implement any change affecting voting without first obtaining approval of the U. S. Department of Justice. Congress has amended and extended the Act several times since its original passage, most recently in 2006 when President George Bush signed a 25 year extension into law. One of the amendments on the subject of this post was approved by Congress in 1975, when a "foreign language" section was added. The Department of Justice has so far ordered more than 300 jurisdictions in more than 30 states to provide ballots, signs, registration forms and voter information guides in foreign languages. In some jurisdictions it is just Spanish or Chinese, in others, like Los Angeles County and Santa Clara County, it is four or more foreign languages. In the City of Los Angeles seven or eight languages are involved! This is ridiculous!

Which languages apparently depends on how many citizens in a particular jurisdiction have a language other than English as their primary language, not necessarily on whether or not they understand English well enough to read and understand the voting ballots and related information.

Why specifically do I think all voting ballots and related information should be provided in English only?

1. Reverting to this practice can save a great deal of money to financially struggling municipal jurisdictions who are having to make sizeable cuts in marginal as well as priority expenditures. We're talking about hundreds of thousand dollars for larger jurisdictions and upwards of $50 million nationally, perhaps even more.

2. Continuing with foreign languages reduces the incentive of immigrants to improve their knowledge of English, something which is generally needed for cultural assimilation, educational advancement and finding more attractive employment opportunities.

3. In order to vote intelligently voters need to be more proficient in English in order to follow discussion of important political issues in newspapers and magazines, as well as radio broadcasts and television programs, especially debates among candidates.

4. I'm rather certain that Department of Justice staff and the staff at municipal jurisdictions have much more higher priority issues to deal with than dealing with this subject. Reverting to English only would enable the Department and municipalities to either save money on outsourcing translating work, and staff through layoffs or shorter hours, or giving their staffs more productive higher priority work assignments.

5. The current selection of which foreign languages should be required in each jurisdiction seems rather arbitrary and inconsistent among jurisdictions. It would be much simpler and more democratic if only English is used, rather than having to make an arbitrary decision on whether Cambodian, Tagalog or Armenian should be the third, fourth or fifth foreign language, and be subject to criticism by those whose language was not selected for whatever reason.

6. Those voters who aren't proficient enough in English, and need some help, can certainly find family members, friends or neighbors to help them better understand the ballots and voter information guides as needed. Not only can this efficiently replace the foreign language information without using more scarce taxpayer funds, and encourage them to better learn English, it can serve as a good means to stimulate discussion of political candidates and issues, and hopefully thereby get more citizens to vote, something that's really needed in this country.

Like with the majority of our public policy issues, the present practice of multiple language ballots will likely not change unless effective and urgent political pressure is applied by our media and the public. I therefore encourage my readers to take action. I fully realize that there are higher priority issues we need reform on, but this is so obvious and simple. As I said, this is a no-brainer!

Wednesday, June 16, 2010

California's Water Crisis

Similar to the overall situation and many issues associated with our critical national energy supply and demand situation, California has a looming complicated crisis with fresh water that is probably not well known to most of our state's 37 million residents. As with most of the issues I deal with in my posts, one or more books could be written about this. Since this is just a simple post, I will try to be relatively brief, provide some limited background, list some key problems, and advise what I think needs to be done.

As just about everyone knows very well, fresh water is the basic ingredient needed for life: water for drinking, water to grow food, water for washing and bathing, water for most industries, especially agriculture, water for much of our recreation, and water for wildlife and our environment. Much of California would be desert or otherwise relatively uninhabitable without water. We just can't do without it.

Precipitation in the form of rain and snow is the primary source of the state's water supplies and this source varies from place to place, season to season, and year to year. Most of the rain and snow fall in the mountains in the north and east, and most of the water is used in the central and southern valleys and along the coast, where the bulk of our population lives. In any year the state's water systems may face the threat of too little water to meet needs during droughts or the threat of too much water during floods. In 2009 California experienced a third consecutive year of drought resulting from below average precipitation and runoff which began in the fall of 2006.

A substantial part of the precipitation and runoff ends up in California's two largest rivers. The largest, the Sacramento River, flows from north to south, while the second largest, the San Joaquin River, which flows from south to north. The two meet in the Sacramento/San Joaquin Bay Delta, roughly between the cities of Sacramento and Stockton, and this delta is the hub of California's water system, channeling water to approximately 26 million people. A lot of this water goes to populous southern California through the California Aqueduct, parallel to much of Interstate #5, which aqueduct was built in the 1960's.

Supplementing this water route, southern California also gets a significant amount of its water from the Owens Valley south of Mono Lake through the Los Angeles Aqueduct and from the Colorado River through the All-American Canal, primarily providing water to San Diego and Imperial Counties in the very south of the state.

Critical elements of our California water system are the many water dams and reservoirs built and maintained since the early part of the previous century. Major among these would include Shasta Lake and Dam in the north, Hetch Hetchy near Yosemite, Folsom Lake and Dam not far from Sacramento, and Lake Oroville north of Sacramento.

The key California agency involved in managing our water supply is the California Department of Water Resources (DWR). On behalf of the state, the agency every 5 years updates the very bulky and technical California Water Plan, providing a framework for water managers, legislators and the public to consider options and make decisions regarding California's water future. DWR is also the state lead in preparing the environmental review for the important Bay Delta Conservation Plan.

What are my layman's view of the main problems leading to what virtually all the experts agree is a looming water crisis?

1. Current drought and unpredictable precipitation levels made worse over time by global warming concerns, aging infrastructure, and risks of a major earthquake which could very adversely affect supplies for an extended period.
2. Our large and growing population, with an estimated 7.3% thought to be illegal immigrants, significantly increasing water demand.
3. California's large and influential agricultural industry which now uses an estimated 80% of the state's developed water supply, but reportedly produces less than 2 1/2% of California's government income. (One crop, alfalfa, is the biggest water user of any crop, using about 25% of our irrigation water, but accounting for only 4% of state farming revenue. Perhaps worse, most of the alfalfa is used to feed dairy cows which generate a huge amount of waste reportedly threatening the quality of the drinking water of 65% of Californians!)
4. The Colorado River serves as an important provider of water to several states, besides California, including Colorado, Utah, Nevada, Arizona and New Mexico, plus the northern part of Mexico. These states are among the faster growing population states in the country and, with Mexico, are demanding more of the water from this key river. Assuming they are successful, which is likely, California's two southern counties will be much more exposed to water shortages.
5. Management of California's water is highly fragmented and decentralized, therefore most likely quite inefficient with DWR in Sacramento, the wholesale water distributors like the large Metropolitan Water District (MWD) based in Los Angeles, and literally several hundred smaller, independent and primarily retail water districts, each with their own management team and board of directors, throughout the state. This structure doesn't make sense in the present crisis environment.
6. From what I have seen, there has been very limited communication to the public about this crisis and what's available on various websites is generally out of date or difficult for most readers to understand well.

What should be done? Based on the problems outlined, the answers are fairly obvious. It seems to me we need to establish an independent, bipartisan water commission reporting to the Governor or State Senate to seriously review all relevant available information, have it professionally analyzed, and come up with a report (of 100 pages or less!) with specific recommendations, timelines and accountabilities, to be approved by the Legislature and Governor.

The issues to be looked at should include, among others, infrastructure updating needs, desalinization opportunities to expand supply, appropriate conservation measures (such as several cities are already experimenting with), satisfactory ways to increase use of recycled water for such as golf courses and parks, greater use of water efficient showers and toilets, removal of federal and state subsidies for agriculture, measures to discourage farmers to grow crops that require a lot of irrigation, and consolidating the hundreds of water districts into a much smaller number to save a great deal of overhead that can pay for any needed research and money to pay for the report and its distribution.

Though potentially controversial, the commission should also consider what can be done to slow down our population growth, including reducing the number of illegals, perhaps with the introduction of a viable guest worker program, and also limiting opportunities for immigrants to come here legally. The report should be condensed into a 2-3 page, easy to read summary to be circulated to the media and available on the internet to the general public.

Sunday, June 13, 2010

Financial Overhaul Bill

Now that the healthcare reform bill has been signed into law, one of President Obama's top legislative priorities is to complete action on the pending financial overhaul bills currently being worked on in the U. S. House and the U. S. Senate. The Democratic congressional leadership's goal is to get a final bill to him before the lawmakers leave Washington for their July 4th break, less than three weeks away. It definitely won't be easy. Many of the key issues are very complicated, there's a great deal at stake that can have a big impact on our economy, there is strong Republican opposition which contends that the Democrats are rushing too much to get a final bill approved, and a filibuster delaying action is certainly possible. Furthermore, the large financial institutions most likely to be affected are lobbying hard to soften some of the bills' provisions. Underlining the complexity factor, the Senate bill at last count was 1,336 pages long!

As a reminder to my readers, the primary purposes of the bills are to help stabilize our economy, particularly the roles played by our major financial institutions, reduce the systemic risks in our financial system, and take other regulatory and oversight actions to minimize the chances that we could once again have another very serious economic recession like we're now recovering from, or, much worse, enter into another devastating depression like our many of our parents and grandparents suffered from in the early 1930's. Certainly the bills represent the most sweeping change in our national financial rules since the Depression. The main point reflected in the bills is that the Federal government will play a more active role in policing the investment banking activities on Wall Street in New York managed by our largest and most powerful financial institutions, including firms like Goldman Sachs, Morgan Stanley, Citigroup, J. P. Morgan Chase, and Bank of America, as well as the U. S. arms of major foreign institutions like UBS, Credit Suisse, and Deutsche Bank.

Some of the key parts of the bills? The plan is for a nine member council, the Financial Stability Oversight Council, to be established under the leadership of the Secretary of the Treasury, currently Tim Geithner. Their job will be to watch for systemic risks and direct the Federal Reserve (our central bank) to supervise our nation's largest financial institutions, not just banks, but also insurance companies and other large players who extend credit and other financial services, with the aim of containing or reducing systemic risks that can have a broad adverse impact on our entire economy if not managed prudently. Another important part is a new Consumer Financial Protection Bureau to provide oversight to how financial institutions are treating retail customers with respect to basic banking services, credit cards, auto loans, lines of credit and mortgages, among key products and services. Of primary interest to the Bureau will be such as the level of fees and charges imposed, the manner these services are marketed, and the clarity and fairness of documentation. The main outstanding controversial issue appears to be how the complex subject of financial derivatives should be handled. The Senate seems to want tougher action than the House is willing to accept.

The key players in getting the bills reconciled into a final bill to be presumably signed into law by President Obama at some point will likely be, aside from the president, Chris Dodd, Chairman of the Senate Banking Committee; Barney Frank, Chairman of the House Financial Services Committee; and Rahm Emanuel, the president's Chief of Staff. Other important players include House Speaker Nancy Pelosi, Vice President Joe Biden, Fed Chairman Ben Bernanke, Tim Geithner, and the Republican leaders in Congress, Representative John Boehner and Senator Mitch McConnell.

As someone who was a career banker, including ten years as an investment banker with one of the majors, what are my views? Firstly, I think it's ridiculous that the Senate bill needs to be as long as 1,336 pages! 300-400 pages ought to be more than sufficient. I think getting these bills right is too important to rush or to stifle good input from the opposition, in this case the Republicans. Given the unfavorable public opinion polls and the upcoming mid-term elections in November, I perfectly understand the desire of the Administration and Democratic leaders in Congress to get a reconciled bill signed into law sooner than later, but, if the time is put to good productive use, a delay of a week or two or even three should not be harmful. While it's wishful thinking these days of strong hyper-partisanship on most issues, it would be beneficial if Congress members would do on these bills what they believe is in the best interest of the country, as opposed to following party ideology or what's lobbied for by special interests.

The leaders named above in finalizing input on these bills should keep well in mind the likely consequences of their actions on other high national priorities, including creating favorable conditions for sustainable economic growth and a high level of good paying new jobs in the private sector for an extended period, reducing our sizable annual budget deficits, returning the country to a balanced budget as soon as possible, and developing a viable near-term plan for reducing our excessive national debt. These priorities are highly important for the nation's and also the world's welfare as we move forward. The priorities are more important than clamping down hard on Wall Street and the other financial institutions, unless the clamping down actually helps us achieve the priorities.

The Republicans are right to question why the overhaul bills apparently do not currently address reforms of the quasi-government agencies involved in mortgage finance, the Federal National Mortgage Association, known as "Fannie Mae," and the Federal Home Mortgage Corporation, known as "Freddie Mac." However, I'm OK with that if the definite plan is to deal with these institutions separately in another related bill.

As mentioned, the big outstanding issue is how the bills should deal with the huge market for financial derivatives, the complex products that have generally been used by financial institutions to hedge financial risks or to speculate on movements in interest rates or commodity prices with the aim of gaining a substantial profit for the institution and large bonus at the end of a performance evaluation period for the individual traders involved. Because the risks can be very high, depending on the transaction and size of the deal, higher capital requirements are a reasonable option to help safeguard an institution. Another option is to limit the scale and types of derivatives activity. A third is to separate the activity from the commercial banks to limit their exposure to high losses and thereby help protect business and individual customers.

Because it's such a complicated business, independent experts need to guide Congress members on the best approach. I'm OK with either taking more time to get this right and get adequate bipartisan agreement on the final input, or, alternatively, agreement to deal with derivatives separately at a later time, after more consultation with the independent experts.

Saturday, June 5, 2010

Israel's Gaza Blockade

The violence that occurred last Monday from the takeover by Israeli commandos of the pro-Palestinian activists' ship, the "Mavi Marmara," was very unfortunate and troubling. At least nine activists were killed and dozens of people were injured, including several commandos. It should not have happened. Although all the facts on the confrontation are not yet publicly available, it would appear that Israel's government and military leaders could have handled the takeover differently so as to have minimized chances of possible casualties as well as the resultant widespread outrage and criticism from around the world.

However, it also seems clear that the Israelis are not the only ones to blame for this tragic outcome. From several reports it appears that a number of the activists physically resisted the takeover, fighting the commandos with sticks and fists, apparently throwing one of the commandos overboard, provoking the commandos to use more force. Additionally, other guilty parties appear to include the Turkish government, previously considered a key and reliable ally of Israel, and IHH, an Istanbul-based Islamic "charity" which was the primary sponsor of the activists' plan to break Israel's sea blockade of Gaza which has been in place since June 2007 when Hamas took control of the Gaza territory after a brief fight with the PLO and the Fatah faction. IHH purchased three of the six ships of which the "Mavi Marmara" was the lead vessel. The seller apparently was the city government of Istanbul. It's been widely reported that IHH has close links to Hamas, still considered a terrorist organization by the U. S. and several of our allies.

This episode represents still another big challenge for President Obama and his administration that he didn't need. He's seriously involved whether he wants to be or not, since Mid-East peace and stability are at stake, the U. S. is Israel's strongest ally by far, Turkey has been a major U. S. partner in NATO and, until this episode, another important friend of Israel. Turkey's government, led by Prime Minister Recep Tayyip Erdogan, has strongly criticized Obama for not denouncing the Israeli commando operation and stated that Turkey can never forgive Israeli for their actions. Obama has understandably used a good deal of his time since taking office in courting Erdogan. But this same Erdogan does not consider Hamas a terrorist organization and he was one of the first major government leaders to congratulate Mahmoud Ahmadinejad for winning in Iran's presidential election last year. Obama must lead the team reviewing our goals and strategies for dealing with Turkey and the problematic future of Israel/Palestinian negotiations, but presumably Secretary of State Hillary Clinton will also be very actively involved.

There are several noteworthy factors in defense of Israel's broadly criticized blockade. Hamas does not recognize Israel's right to exist and on several occasions their leaders have even made it clear that they are committed to Israel's destruction. They are also opposed to any peace agreement between the Palestinisans and Israel. Of course, their militants have many times sent destructive rockets into towns and villages they've been able to reach in the south of Israel. While it's a rather complicated issue, it would appear that the blockade of Gaza is in fact entirely legal under international law in the circumstances we have here. It's also important to be reminded that Israel still allows humanitarian aid to be provided to the Palestinian people by shipment through their port of Ashdod, located about 40 kilometers south of Tel Aviv. The blockade has been publicly announced for about three years. Everyone involved knew that Israel would not allow any pro-Hamas or pro-Palestinian militants to break their blockade. No one should have been surprised.

It's clear there will be at least one thorough investigation of the confrontation on the "Mavi Marmara." What's not clear is who will be leading and participating in the investigation(s). Israel will most likely have their own. Turkey may have their own, but they probably prefer one led by the United Nations. The outcome of the investigation is not entirely clear either. If it's a U. N. investigation, I suspect there will be strong criticism of Israel. It's less likely there would be any significant direct criticism of Turkey, although the U. S. would no doubt lobby to make sure that's part of the conclusions.

Given the long, largely unsuccessful history of negotiations between Israel and the Palestinians, despite high-level mediation by several U. S. leaders and political support from the U. N., Hamas' control of Gaza, and this latest incident, it is very difficult to be optimistic about any substantive lasting future peace agreement. However, there are a number of pragmatic action steps that could be very helpful, aside from continuing U. S. mediation. First, an Israeli apology for the deaths and injuries sustained last Monday from their commandos and a clear willingness to stop any further Israeli settlements in the West Bank. Second, though frankly it's quite unlikely, Hamas' recognition of Israel's right to exist, commitment to non-violence, and support of a U. S. and U. N. sponsored balanced and fair peace agreement. Third, also not probable, the Turkish government accepting some blame for what happened Monday and publicly revising their harsh words toward Israel and the U. S. Fourth, the Palestinians in Gaza voting or fighting for a much more moderate position on peace with Israel. Fifth, full support for a balanced and fair peace agreement from Turkey, Egypt, Jordan, Saudi Arabia.

Clearly, with all the other higher priority major public policy issues President Obama is dealing with, and continuing tough foreign policy issues with Iran, Iraq, Afghanistan and North Korea, among others, he cannot justify spending a great deal of his limited time on this subject during the rest of his term. Other political leaders will need to step up, especially those in Israel, the Palestinian territories, and the rest of the Mid-East. The prospects certainly don't look good right now.