The study on U.S. income tax treaties focuses on the need to prevent third-country residents from inappropriately obtaining the benefits of U.S. income tax treaties, in particular by achieving inappropriate reductions in U.S. withholding taxes. The study notes that in recent years interest payments have surged from foreign-controlled U.S. corporations to related parties in countries that are a party to a U.S. tax treaty with no “limitation on benefits” (LOB) provisions and that provides significant reductions in withholding rates. Such exploitation of those treaties without anti-treaty shopping protections confirms, according to the report, that, (1) the LOB provisions in other U.S. agreements appear to provide significant deterrence against abuse, and (2) the Treasury Department must continue its ongoing efforts to revise treaties with no or inadequate LOB provisions.

2008 FILING FIASCO LOOMS IN U.S. AS CONGRESS FAILS TO AGREE ON ALTERNATIVE MINIMUM TAX PATCH

The Oversight Board of the IRS has voiced “grave concerns” about the very real possibility of a chaotic 2008 filing season if legislation to reduce the impact of the Alternative Minimum Tax (AMT) is not enacted soon. In a letter to the senior tax writers on the Senate Finance Committee, the Oversight Board warned that the longer AMT legislation is delayed, the more the IRS’s ability to process returns and issue refunds in a timely manner will be threatened, while a significant burden will be heaped on the shoulders of ordinary taxpayers. Should Congress change the law on tax provisions that deal with the AMT, the IRS must reprogram and thoroughly test its systems before it can process electronic and paper tax returns, a process that is expected to take seven weeks.

Congress must amend AMT legislation in time for the 2008 filing system in order to prevent an estimated 21 million additional taxpayers being dragged into the parallel tax system, which was originally designed to stop the wealthiest few Americans from eliminating their tax liability via the use of various deductions and other methods. However, the legislation that would lead to the enacting of a one year “patch” is currently bogged down in Congress, as lawmakers dispute proposed measures to offset the cost of AMT relief.

In essence, Congressional Republicans want a clean bill that would simply extend AMT relief for an additional year and certain other expiring tax relief provisions for another two years. Senate Minority Leader, Mitch McConnell has insisted that any further “pay-fors” and add-ons proposed by Democrats must get 60 Senate votes to pass, and lawmakers were unable to agree a compromise before last week’s Thanksgiving recess.

The Oversight Board estimates that a late filing season start date of January 28, 2008 would result in $17 billion in delayed refunds, while a February 18, 2008, filing season start date would result in $87 billion of delayed refunds. These delays would hit taxpayers filing paper returns the hardest, and the Board has warned that the problem will be compounded if significant numbers of taxpayers who normally file electronically switch to paper filing.

CANADIAN FINANCE MINISTER SET TO UNVEIL INTERNATIONAL TAX REVIEW PANEL

Canadian Finance Minister, Jim Flaherty has indicated that he is close to revealing the names of those who will serve on a government advisory panel, which will suggest where improvements can be made to Canada’s international taxation regime.

The international tax panel was one of the announcements made by Flaherty in his 2007 budget speech earlier this year. It has been created to examine areas in which the taxation of international transactions can be improved to make Canada a more favorable location in which to conduct international business, and give it a competitive edge over its trading partners.

Canada’s Conservative government recently announced some legislative improvements to its international tax regime as part of the budget laws implementation process, including a proposal to eliminate withholding tax on arm’s length outbound interest payments to residents of all countries, effective January 1, 2008. Together with new amendments to the tax treaty Canada has with the U.S., Flaherty says that the new proposals will increase access to foreign capital markets, and reduce costs for Canadians and Canadian businesses that borrow from foreign lenders.

BULGARIAN FLAT TAX GETS GO AHEAD

It has been announced that Bulgaria’s parliament has approved proposals to implement a 10% flat tax from the beginning of 2008. If implemented, it will officially be the lowest flat tax rate in place in Europe, and one of the lowest throughout the world. The flat tax is set to replace Bulgaria’s current progressive system of taxation, but deductions will be permitted for certain categories of employment.

However, there has been much debate since the decision was announced, and Socialist MP Georgi Bliznashki has hit out at the pronouncement, stating, according to the Sofia News Agency, that, “This tax system will further deepen the social inequality in Bulgaria.”

Former PM Ivan Kostov and leader of the rightist Democrats for Strong Bulgaria (DSB) party has defended the decision, though, arguing that implementing this new system of taxation is the only way to get the country’s rich to pay their taxes.

The change in taxation is also expected to have a positive impact on future foreign investment opportunities from other countries, as it increases transparency. Bulgaria is the latest of the former Soviet republics to opt for a flat tax, following in the footsteps of Estonia, Slovakia, Romania and Albania.

ISRAELI TAX OFFICIALS TO STRIKE OVER AUTHORITY CONSOLIDATION PLANS

As the beleaguered Israel Tax Authority seemingly lurches from one crisis to another, workers at the ITA have threatened to come out on strike in protest at plans to merge the income tax and VAT departments. Nachum Friedlov, head of the worker’s committee of the income tax department told the Jerusalem Post that the ITA “is already in a state of complete crisis operating without leadership for months” and that Finance Minister Ronnie Bar-On should reject recommendations to unite the two divisions.

According to Friedlov, the ITA’s lack of direction has led to plummeting confidence and lower tax collection, and any further upheaval should be avoided. “We – the income tax and the customs & VAT worker’s committees – have notified the Finance Ministry of our opposition to the recommendations and demand that the search committee terminates the search for a new director,” he told the Jerusalem Post.

The threat of strike action by ITA workers has followed closely in the wake of new revelations of corruption with the tax authority. Last month, six ITA employees, in addition to one employee of the Jerusalem Municipality, were arrested on by police on suspicion of accepting bribes from businesses to reduce income tax payments, cancel property liens, terminate tax investigations and pay tax refunds. More arrests are expected to follow as the police widen their investigation into the affair.

COLORADO SHUTS DOWN LAST “OFFSHORE BANK”

Colorado Banking Commissioner Richard Fulkerson delivered an order of involuntary liquidation to American Intercapital Depository & Trust after the state’s Banking Board voted to seize the institution. The order referred to AIDT as “hopelessly insolvent” and said there is a “general untrustworthiness” of its officers and managers.

The board appointed local attorney Phil Feigin, the former state securities commissioner, as the receiver. Feigin will now search for any missing assets, manage its liquidation and prepare a report to regulators as to whether there was any wrongdoing in the institution’s failure. Fulkerson left the door open for AIDT, saying, “If everything is there and they are solvent, they get it back. And that would be the ideal outcome.”

The closure was a dramatic development in an ongoing tussle between AIDT and the Colorado Division of Banking. The action was spurred after a customer wanted AIDT to return a $4 million deposit and $120 million in assets AIDT was managing, according to the Division of Banking. The customer sent a demand letter November 9 and went to state regulators last week to express concern. “We demanded the management of AIDT address and resolve that situation,” Fulkerson said. “They were either unwilling or unable to do so.”

AIDT reported $6.63 million in deposits on Oct. 31 and had $10.7 million in reported liquid assets, the Division of Banking said. But many of the assets, such as $4.1 million in stock in the Chicago Board of Trade, come from a commodity-trading subsidiary and cannot be used to pay depositors, the division says. The $120 million AIDT is managing for the customer would be held by a custodian and would not show up on AIDT’s balance sheet.

Swiss-style “banks” bring scant return to Colorado.

The idea was to make Colorado a home for Swiss-style private banks that would attract millions, if not billions, of dollars from outside the U.S. The state would get a piece of the action in the form of an assessment on the money these “foreign capital depositories” took in.

It has been eight years since that legislation passed. Colorado has chartered two of the private banks since 2003 – American International Depository & Trust and Tuus Financial. The state’s take, after all this time and energy? Through June 2006, not a dime. As of then, the two depositories had taken in no money.

“Foreign Capital Depositories have failed to produce anticipated state revenues . . . and there are questions as to the whether the basic business model is practicable,” Banking Commissioner Richard Fulkerson wrote in a memo to the state’s Legislative Audit Committee in August 2006. Jerry James, the founder and chairman of AIDC, says the idea remains viable. He says his company took in its first deposits and paid the state an assessment in December.

Montana, which passed its law before Colorado did, repealed it in 2006. The only applicant was allegedly funded in part by proceeds embezzled from an elderly woman. Montana State Sen. Larry Jent, who sponsored the bill killing the law, said, “We spent a bunch of money setting it up and never made a plug nickel.”

“FINANCIAL FINGERPRINTS” WILL HELP TRACK TERRORISTS

Bahrain’s financial institutions were urged to follow the financial “fingerprints” of international terrorists and help bring them to justice, by experts at a high-profile security meet. Former UK Home Secretary and Conservative MP Michael Howard led a panel of international speakers in calling for a coherent international response to the huge global money laundering industry which could be worth as much as $500 billion – a growing portion of which was being used to fund terrorist activities.

“Terrorists move funds through international system to train new members, pay operatives, acquire weapons, stage attacks and sometime carry out ostensibly legitimate activities to provide a veil of respectability for essentially terrorist organisations,” Howard told delegates. “Just as globalization has created new opportunities for legitimate business so it has created additional numerous opportunities for terrorists and criminals to move funds.”

He called upon those in the financial industry to essentially add the role of detective to their duties, following the sometimes faint trail of international terrorists by scrutinizing the evidence they leave behind after each transaction. “Like fingerprints ... financial information can become one of the most powerful investigative tools available – the true potential of which is only now beginning to be understood,” he said. “The ability to deny access to the financial system to international criminals and terrorists presents a new opportunity to weaken their networks. If this counter-attack on terrorist networks is to succeed it is essential that governments and law enforcement agencies in different countries co-operate with each other.”

Delegates had earlier listened to a presentation which showed the steps the Central Bank of Bahrain is taking to combat terrorist financing – including the quizzing of people at banks looking to open new counts with unexplained large sums of money. “Financial measures can deter crime and terrorism by increasing the risk to perpetrators of being caught and decreasing the amount they can expect to gain,” the speaker said. “For example: asset recovery powers – strip criminals and terrorists of funds and property so they jeopardize not just their liberty but their financial lifeline as well.”

Ithmaar Bank chief executive Michael P Lee said banks should undertake the extra effort to remain vigilant against terrorism. “Combating terrorist financing imposes inconvenience on us all, whether it is at airport security queues, in frequent travelers counting cash to ensure they are not carrying more than $10,000, and this inconvenience is likely to escalate,” he said. “If the only victory of the terrorists is to create massive inconvenience, they will have only had a hollow victory.”

MONOPOLY “MONEY”

Let’s get straight on who is perpetrating the fraud.

Bernard von NotHaus, the creator of the Liberty Dollar, is optimistic that he and his associates will have the benefit of “a spectacular trial” for the supposed crime of providing customers with something of value – platinum, gold, silver, and copper coins – in exchange for something innately value-less – the decorated ragpaper and junk metal slugs the Regime insists we treat as money. Speaking with the New York Sun – the quasi-official publication of the Warfare/Homeland Security State – von NotHaus anticipated the opportunity to “put this country’s monetary system on trial.”

He said this as if he truly believes the Regime would permit such a thing to happen. And even if von NotHaus were permitted the luxury of a trial – as opposed to having his company’s wealth simply stolen through “asset forfeiture”, which appears to be the case at present – it is entirely possible that our monetary system will effectively collapse before the case against the Liberty Dollar is aired in a courtroom.

Should that collapse occur, von NotHaus – who, like most intelligent observers, has warned that the fiat money system eventually must destroy itself – will not be allowed to argue that truth is a perfect defense. The FBI’s investigation – which took two years and employed the services of “confidential informants” and other covert means to collect evidence of peaceful, mutually beneficial commercial exchanges – is designed to set up a political trial, if a trial is even permitted.

According to the affidavit (PDF) filed by FBI Special Agent Romagnuolo, the political objective of von NotHaus’s organization, The National Organization for the Repeal of the Federal Reserve and Internal Revenue Codes (NORFED) makes it a subversive criminal conspiracy. “As the organization’s name implies,” writes Romagnuolo, “the goal of NORFED is to undermine the United States government’s financial systems by the issuance of a non-governmental competing currency for the purpose of repealing the Federal Reserve and the Internal Revenue Code.”

As we should expect of someone good enough for government work, Romagnuolo is dishonestly amalgamating two issues here – the first being NORFED’s creation of a currency intended to compete with the “dollar” (the quotation marks are apt here, since the fiat scrip known by that name is not a dollar as defined in law), the second being the effort to repeal the measures that created the Federal Reserve and Income Tax systems. The latter is a far broader movement than the former, and it includes many millions of people who had nothing to do with NORFED or the Liberty Dollar. It is difficult to figure out to what extent conscious dishonesty, rather than mere ineptitude, is in play here. But his description of the “criminal activity” NORFED and its associates supposedly engaged in leaves the impression that anyone who seeks the same objectives is likewise engaged in criminal conduct, albeit through other means.

What are the elements of this supposed crime? The allegation is not that von NotHaus and his associates sought to commit robbery or fraud, but rather that they sought to bring about the repeal of existing laws, and changes in present institutions, through peaceful, consensual means.

Where “undermining” the nation’s financial system is concerned, nobody does it better than the Fed. The greenback’s relentless decline is driving economically marginal Americans toward starvation, while buoying the spirits of foreign detractors. Yet we are supposed to believe that NORFED’s largely unsuccessful efforts imperil whatever remains of our national prosperity.

Now that Chavez and Ahmadinejad have made explicit public mention of the innate worthlessness of the fiat dollar, it would not surprise me to see the Regime make an attempt to describe NORFED, the Liberty Dollar (and perhaps even the Ron Paul presidential campaign) as “ideational co-conspirators” with our foreign enemies du jour. Implausible as such a charge would be, it would still make as much sense as the “crime” alleged in the FBI affidavit. The “offense” here, in fact, is to find a creative and peaceful way to challenge the Regime’s fraudulent financial system, which is upheld by lethal force.

Nobody involved in the Liberty Dollar movement ever compelled anyone to accept the private currency, or deliberately defrauded people into accepting it. That is the government’s racket. Nor did the movement circulate counterfeit U.S. currency – that is, non-official counterfeit currency. As the FBI affidavit concedes, the Liberty Dollar was exactly what it was advertised – privately minted coins made out of precious metals, or warehouse receipts backed by the same.

Critics of the Liberty Dollar – the kind of people who mistake snarkiness for substance – sometimes describe it as the equivalent of Monopoly money, because it is not backed by the “full faith and credit” of the Regime. The inescapable truth, however, is that the dollar is an instrument of force and fraud, and since the Regime claims a monopoly on the same, it is the federal “dollar” that is best described as monopoly “money”.

THE COST OF POLITICIANS

As the U.S. political season moves into high gear, a full year before it will blessedly end, the thought inevitably occurs to an economy-minded person: How much do all these politicians cost? Not simply the cost of their endless and annoying campaigns, but the money diverted to economically inferior uses by political pressure, the mistakes made through their ignorance of subject matters in which they have no competence but only political authority, and the economically damaging decisions made in pursuit of non-economic and often anti-economic goals. When added up, the total is mind-boggling.

The cost of politicians must be distinguished from the cost of government itself. Examples such as Britain before 1832 have demonstrated that in societies where political considerations and electoral success play only minor roles and war is avoided, government can be managed at far less cost than is now deemed necessary. One of the great ironies of the American Revolution is that the colonists, who rebelled against British-imposed taxes lower than those of the mother country, were in reality living in the lowest tax polity in the history of civilized mankind. Needless to say, once the U.S. had achieved independence, the taxation on its people was never as low again, even though for the country’s first century and a half most U.S. governments pursued admirably frugal policies.

In the category of money devoted to economically inferior uses, agriculture subsidies must surely hold pride of place. Initiated in order to protect the living standards of impoverished Dustbowl farmers and French peasant landholders, they have become entrenched as a subsidy to agribusiness and a huge blockage to freer trade. Their cost is not only the direct out of pocket expense of the U.S., EU and Japanese subsidies, but the economic cost of the trade foregone by the death of the Doha round of trade talks. As such, the annual global cost of these excrescences must be in the trillions.

A second area in which politicians divert scarce resources to economically inferior uses is that of construction. Local governments build excessively large public facilities that the market does not demand. National governments build ugly modern prestige public buildings (France) or unnecessary motorways deep in the countryside (Japan). Both local and national governments combine to subsidize ludicrously wasteful bids for major sporting events such as the Olympics, or unnecessary sports stadia such as the new baseball stadiums in Washington and New York, both subsidies to sports teams that, being in large wealthy media markets, emphatically do not need them. The Third Reich was famous for the quality of its public buildings and ceremonies. Other polities are equally economically profligate.

Ethanol subsidies are a combination of government devoting money to economically inferior causes and politicians meddling in matters they do not understand. Ethanol from corn, the production methodology subsidized by the George W. Bush administration, is a thoroughly inferior way of producing ethanol, itself a somewhat inferior automobile fuel whose benefit to the environment is indeterminate at best.

Global warming is an area in which politicians do not understand the science, but give Nobel prizes and gigantic subsidies to the most alarmist scientists. Having “proved” to its own satisfaction that global warming is real the political process is now attempting to close off debate in order that it can perpetrate an entire new range of controls, boondoggles and subsidies that will reward favored groups. The irrelevance of the actual science is demonstrated by the universal politicians’ preference for “cap and trade” control, which requires politicians to set emission targets based on extensive lobbying, over “carbon tax” methodology, which would require politicians to impose an unpopular tax on the electorate, thus bringing the true cost of global warming boondoggles out into the open.

Finally, politicians act without due competence in the area of finance, a sector vital to the health of an economy, yet the workings of which are governed by well-understood if often counterintuitive economic laws. The Federal Reserve made insufficient allowance for bank failures after 1929 and thereby brought about a monetary collapse that greatly worsened the Great Depression. The excessive monetary creation of 1965-73, and still more that of 1995-2007, created economic problems far more intense than any short-term benefits of stock market and housing euphoria that they brought. All were decisions motivated by political factors, that had huge adverse economic consequences. (Of course we have not yet seen the great bulk of those consequences from the 1995-2007 episode.)

The third area is economically counterproductive decisions made in pursuit of non-economic goals. Try World War I for a start, on the parts of both Britain and the U.S. Neither had anything to gain economically or even politically from participation in the war, yet in both cases political blundering in pursuit of no well established principle caused untold economic as well as personal harm. Similarly, the 2003 invasion of Iraq had no clear economic justification – if it was undertaken to keep oil prices down, then why are they running at four times their level when the operation was undertaken? Both Venezuela and Canada have in tar sands oil resources greater than those of the entire Middle East. Getting intervention in the Middle East (and in general the Wilsonian pursuit of global democracy) off the agenda is the greatest service the next President could perform for the U.S. economy.

Finally there is the design of the tax system, whether it is the high marginal income tax rates in Britain of the 1970s (over 90% at the peak) or the huge subsidy for the housing sector implicit in the home mortgage interest deduction, or the barrier to corporate investment inherent in the double taxation of dividends. All these protrusions on the tax code were imposed by politicians pursuing economically damaging value agendas. All could usefully be removed from a tax system that was anywhere close to economically optimal.

How could this problem be addressed? One approach is to shrink the area of political decision-making as much as possible, returning the nation’s problems to the private sector and eliminating controlling and rent-seeking government agencies. That was the approach followed by most U.S. Presidents up to Calvin Coolidge (1923-29). In Coolidge’s view, “the business of America is business” and government should keep out of the way. If politicians do not control an economic activity, they can only tax it, imposing highly visible costs that are more or less unpopular.

When government cannot be eliminated, structures should be established that make resource allocation and regulation as automatic as possible, so that politics and lobbying can play little role. In monetary policy for example, a fixed rule such as the Gold Standard eliminates the highly political Federal Reserve from monetary policy and makes monetary tightening automatic when a bubble forms. Even without a Gold Standard (which may be too deflationary in a world with substantial growth of population and economic activity) a fixed statutory limit on money creation would be a highly valuable control. New Zealand did it in its Reserve Bank of New Zealand Act of 1989, and extended the freedom from political manipulation directly into the political realm by the Fiscal Responsibility Act of 1994. In the U.S., the line-item veto, passed in 1996 and invalidated through bizarre reasoning by a 6-3 Supreme Court vote in 1998, would have provided under a competent President (not always available, alas) at least some protection from the worst excesses of lobbying and Congressional log-rolling.

The other approach to reducing the costs of politicians would be to eliminate politics as far as possible from the process of government by limiting the number and frequency of elections. Autocracy does not work, because it fails to solve the succession problem and frequently leads to abuse. Hereditary monarchy does not work, because of the likelihood that only about a quarter of monarchs will be competent. As Turkey and China showed, the odds can be improved by selective assassination, but that is probably not a route one wants to pursue. Nevertheless, the democracy in the U.S., in which elections are held for even the minutest office, almost all senior officials are politically appointed – thus greatly reducing the quality of the civil service – and politicians spend the great majority of their energy on fund-raising for reelection is a governmental system so likely to abuse that it would never have been designed that way (and indeed was not).

One could imagine a system, technically democratic, that worked somewhat like the Catholic Church, in which only the President/Pope was elected, for a life term, and election was by a College of Cardinals appointed (or, in a democracy, elected) continuously or annually, with no high-profile and expensive periodic elections. The “College of Cardinals” would have no other function than conducting elections of the Chief Magistrate. This was the system proposed by the more conservative Founding Fathers, which is why the Electoral College exists. It has also served the Papacy quite well for two millennia. Such a system would provide democracy but almost no politics and would thus hugely reduce the costs that politicians impose.

The solutions are difficult, but the problem is there and appears to be getting worse. The number of lobbyists in Washington has doubled since 2000 and the annual number of Congressional spending earmarks has multiplied 10-fold since 1994. As we turn our jaded attention once again to the political process and the selection of a government for 2009-13, it is worth remembering ... there must be a better way.

NORTH KOREAN FACTORY CHIEF ACCUSED OF MAKING INTERNATIONAL PHONE CALLS IS EXECUTED

A North Korean factory chief accused of making international phone calls was executed by a firing squad in a stadium before 150,000 spectators, a South Korean aid group reported. Public executions had declined since 2000 amid international criticism but have been increasing, targeting officials accused of drug trafficking, embezzlement and other crimes, the Good Friends aid agency said in a report on the North’s human rights.

In October, the North executed the head of a factory in South Pyongan province for making international calls on 13 phones he installed in a factory basement, the aid group said. He was executed by a firing squad in a stadium before a crowd of 150,000. Six people were crushed to death and 34 others injured in an apparent stampede as they left the stadium, the aid group said.

Most North Koreans are banned from communicating with the outside world, part of the regime’s policies seeking to prevent any challenge to the iron-fisted rule of Kim Jong Il. The North in recent months has carried out four similar public executions by firing squad against regional officials and heads of factories, the aid group said.

Good Friends, which did not say how it obtained the information, gave no exact figures of the public executions this year. Some of the group’s previous reports of what was happening inside the North later have been confirmed. The communist country insists it does not violate human rights but long has been accused of imposing the death penalty for political reasons, holding thousands in prison camps, torturing border-crossers and severely restricting freedom of expression and religion.

UNCONNECTED DOTS

Why the FBI failed to stop 9-11. (Hint: It had nothing to do with the Patriot Act not yet being in place.)

For years federal authorities have argued that antiquated laws kept the cops from stopping 9-11. They said the failure to prevent the terrorist attacks demonstrated the need for the PATRIOT Act and every other proposed expansion of the government’s surveillance powers. But in testimony before Congress in September, Director of National Intelligence Michael McConnell changed tack, saying “9-11 should have and could have been prevented” after all. The authorities simply “didn’t connect the dots.”

McConnell did not draw the obvious conclusion: If greater federal power was not needed before 9-11 to stop terrorists, then even more federal authority is not needed now. Instead, McConnell argued that the Protect America Act – which allows the attorney general and the director of national intelligence, without judicial oversight, to authorize surveillance of international phone calls and email involving people in the U.S. – made vitally needed changes to the Foreign Intelligence Surveillance Act.

How does the supposed need for greater surveillance power square with McConnell’s declaration that 9-1 was preventable and his lament about failing to connect the dots? How did we get the dots without the Protect America Act?

Via good old-fashioned police work that top officials in the FBI ignored. Federal agents on the ground knew that hijackers Khalid al Mihdhar and Nawaf al Hazmi had sought pilot training. They knew Zacarias Mous­saoui had sought the same sort of training. He was carrying 747 manuals when he was picked up on immigration charges. In the days leading up to 9-11, Minneapolis FBI agent Harry Samit repeatedly tried to obtain permission to search Moussaoui’s laptop computer and belongings. Headquarters refused to seek a warrant.

New details on just how costly that denial proved to be were first published in a widely overlooked September 10 story by Greg Gordon, McClatchy Newspapers’ Washington reporter. Gordon discovered that the FBI had enough information to arrest part of Al Qaeda’s financing network in the days before 9-11 – information that could have stopped the hijackings. Cue McConnell’s dots.

As Gordon reports, FBI agents at Moussaoui’s trial testified that had he confessed to the plot after his August 16 arrest on immigration charges, thus giving them access to his notebooks before 9-11, they could have moved on 11 of the 19 hijackers. But Washington steadfastly refused to move on information developed from the field offices. Rather than endlessly tweaking the intelligence-gathering statutes, the White House should have spent the past six years addressing the “obstructionism, criminal negligence and careerism” that Samit cited as the roadblock in his investigation. It obviously has not.

It was bureaucratic hubris, not a lack of actionable intelligence, that allowed 9-11 to happen. The same hubris continues to demand that ever more raw surveillance data be dumped into the same slavering but useless federal maw.

“STATE SECRETS” DOCTRINE DRAWS SCRUTINY

Congress, courts examine Bush strategy to protect surveillance program.

In federal courts and on Capitol Hill, challenges are brewing to a key legal strategy President Bush is using to protect a secret surveillance program that monitors phone calls and e-mails inside the U.S.

Under grilling from lawmakers and attack by lawsuits alleging Bush authorized the illegal wiretapping of Americans, the White House has invoked a legal defense known as the “state secrets” doctrine – a claim that the president has inherent and unchecked power to shield national security information from disclosure, either to plaintiffs in court or to congressional overseers.

The principle was established a half-century ago when, ruling in a wrongful-death case brought by the widows of civilians killed in a military plane crash, the Supreme Court upheld the Air Force’s refusal to provide an accident report to the plaintiffs. The government contended releasing the document would compromise information about a secret mission and intelligence equipment.

Sen. Arlen Specter of Pennsylvania, the senior Republican on the Judiciary Committee, believes the White House has gone too far in invoking state secrets to halt civil lawsuits. “We have the authority to define the state secrets doctrine,” Specter says. “I don’t think that the simple assertion of state secrets ought to be the end of the matter.” Specter, Sen. Edward Kennedy (D-Massachusetts), and others are working on legislation that would direct federal judges to review the president’s state secrets claims and allow cases with merit to go forward.

Practices among judges vary. Some accept state secrets claims outright, dismissing cases on the government’s word. Others read the privileged information and decide for themselves, but almost invariably side with the government, according to legal scholars. The draft legislation is modeled on procedures used in criminal cases that involve classified information. The Classified Information Protection Act lets judges review classified information a criminal defendant wants to use in his defense, but which could compromise national security if it were released publicly. The law allows the court to delete classified passages, substitute summaries of the information, or substitute a statement of facts that the classified information would prove. The measure could become part of the Senate’s new eavesdropping law, expected to be voted on in early December, the aides said.

In another challenge to Bush’s position on classified material, a federal judge in Virginia last week ordered the government to give trial prosecutors, defense lawyers and her clerk security clearances to review classified material in a terrorism case. Defense lawyers say the material will show the government failed to turn over evidence obtained by illegally monitoring their client’s communications, and they want a new trial. The government says the information is protected by the state secrets privilege. And in a case in Oregon, a U.S. district court judge is set to decide whether the 1978 Foreign Intelligence Surveillance Act trumps presidential claims of secrecy.

Ultimately, the Supreme Court is unlikely to be friendly to a challenge to the state secrets doctrine. In October it unanimously declined to hear a CIA torture allegation case that the Bush administration wanted dismissed on secrecy grounds. And in 2005, the Supreme Court unanimously upheld the state secrets doctrine in an espionage contract case.

AMERICANS: SHEEP TO THE CONSTITUTIONAL SLAUGHTER?

Judge Andrew Napolitano is one of American media’s most tenacious defenders of Americans’ rights. His official title at Fox News, where he appears regularly on Fox and Friends and The Big Story, is “Senior Judicial Analyst”. But at the often Bush-besotted network, the decidedly skeptical Napolitano thinks of himself more as “House Civil Libertarian”.

He is the youngest life-tenured Superior Court judge in New Jersey history, and a former teacher of constitutional law at Seton Hall Law School. He also writes books alerting Americans to how their own government threatens their liberties, including The Constitution in Exile and Constitutional Chaos: What Happens When the Government Breaks Its Own Laws. Nick Gillespie interviewed Napolitano for our March 2005 issue.

Napolitano’s latest book is the pugnaciously and provocatively titled A Nation of Sheep. The book is certainly sharply critical of the Bush administration for its assaults on our freedom and privacy. But Napolitano also provides valuable historical context, showing there is little new under the sun when it comes to the tendency of power to expand, even in a nation explicitly built to keep government powers as tiny oceans in a sea of individual rights.

He tells of Daniel Ellsberg’s brave stance against government wartime secrecy during Vietnam, former Ohio Congressman Clement Vallandigham’s standing up to Abraham Lincoln (and subsequent arrest and banishment after a military commission trial for doing so), and Vermont Congressman Matthew Lyon’s arrest for insulting President John Adams.

The book is wide-ranging in history and subject matter, containing entertaining (and often blood-curdling) takes on potential threats from ever-present surveillance cameras, the TSA, the government’s insistence that it can grab any private information a company may have collected about you, the press’s contemptible fearfulness, and our government’s yen for torture. It hits the pleasing tone of all-American barn-burning dudgeon that animated the Americans who, enraged with Lincoln’s treatment of Vallandigham, as Napolitano writes, “rioted and burned the local Republican building, cut down telegraph lines, and destroyed a bridge.”

I spoke to Judge Napolitano by phone, touching on some of the matters that most alarm him these days about America, a nation that has in his estimation become alarmingly close to a nation of sheep.

A NATION OF SPECULATORS

How long does a condition last before people generally consider it permanent and adjust their behavior to accommodate it? Credit inflation created by Federal Reserve Bank policy has been uninterrupted since prior to World War II. How permanent is that, and what kinds of perverse behaviors does such an assumption of permanence foster?

For one, people no longer save. Permanent inflation destroys the value of any savings held in dollars so people rapidly adopt actions that avoid this invisible tax. People immediately spend whatever money they have, before the cost of what they want inevitably rises (actually, before the value of their dollars declines in the sea of fresh dollar credits).

What, then, do we all do with the excess productivity our division-of-labor economy yields? We speculate. To me, saving is setting aside something with no expectation of gain, simply holding onto what I have. Speculation is involves risking something of value in order to gain more than that risked.

Holding Federal Reserve Notes under the mattress in an environment of inflation is to accept a guaranteed loss, year in and year out. Not such a great deal. Instead, we have mutual funds. We have hedge funds. People can invest in precious metals, mining stocks, and for those willing to take even more risk of loss, options contracts and futures contracts that allow the control of large blocks of value but require only a small margin. We even have options on futures contracts to satisfy the gambler’s gambler. But what about those who do not wish to gamble?

I hear people all the time say they are saving in their 401(k) plan at work. They tell me they do not invest in stocks. They have mutual funds. Huh? They are speculating, and they do not even know it.

Do you know any real estate speculators? I am not referring to the neighbors who bought five Florida condos planning to flip them. I mean anyone who put 20% or less down on a house and is paying off the mortgage over 15, 20, or even 30 years. I was a real estate speculator. Chances are, you are too. Lots of folks never plan to pay off their homes. The speculator’s rule is that once capital appreciation has raised your equity in your investment enough you use that to leverage up to a higher priced asset. In this case you buy a bigger house, often restarting the term of the loan.

Why not? Homes have experienced almost uninterrupted price inflation, and inflation is the speculator’s friend. You “invest” a small amount but enjoy capital price gain on the value of the entire property, even the part you do not actually own. Magic! The joys of leveraged speculation without feeling the fear of loss that usually comes with speculation. What is to fear when price inflation is guaranteed by our friends at the Fed?

We are a nation of speculators. The Fed provides the whip to drive the herd into speculation, and decades of experience lull us all into a sense of comfortably complacency. The process invisibly impoverishes people and keeps them hanging on political promises from Washington, D.C. and the local state legislature, so politicians absolutely love it.

All these behaviors have gone on for a long, long time. But there is no way that our times are in any way normal. Credit cards and home loans have been around for decades, but recently people became so complacent that both were practically thrown at persons with little capacity to manage and no history of servicing the payments on their debts.

This zenith in wild speculation coincided with governments at all levels going on their own spending sprees – paying for global wars and nation-building, promising public employee unions king-sized retirement packages ... nothing was too extravagant.

While the length of a trend tells us nothing about its remaining lifespan, it has been said that things that cannot go on forever, don’t. One day, perhaps soon, we will experience a phase change and what was deemed permanent simply ... ends.

I know lots of people think this stable inflation will end in hyper-acceleration, but what if that is wrong? What would it look like if the seemingly permanent trend of inflation reversed?

First and foremost we should see a widely owned asset class convincingly reverse from wildly overpriced amid a speculative mania to decline amid evidence of a contraction in credit availability. The dominant belief is that significant or protracted contraction is impossible, yet how else should events in the real estate market be described? It remains to be seen if the contagion of credit contraction spreads and grows. I suspect it will, but have no proof.

Prices for things are high because of a deluge of credit-based liquidity, but clearly that flood is draining out from under home prices. Switching metaphors, visualize that prices for myriad goods and services are supported on the back of a dirigible of Hindenburg proportion – the hydrogen being analogous to a vast balloon of credit and debt. What might an economy so supported look like if the fire spreads?

If no one remembers what the absence of inflation is like, consider how unprepared is a nation of speculators for a conflagration of its opposite.

THE MONSTERS ARE DUE ON WALL STREET

Greed. Fear. They are the two emotions that rule financial markets. Greed sends the markets up, while fear sends them down. Lately, fear has begun to sink its claws in. For instance, take the lead sentence from a page 1 story on November 27 in the Wall Street Journal: “Fears of a credit squeeze and economic downturn pushed the Dow Jones Industrial Average into a full correction, as yesterday’s 1.83% decline sent it 10% below its October peak ...”

Fear makes people want to sell their stocks. It takes a level head to shake off thoughts of fear when others seem consumed by it – particularly when you invest in the markets. Technical analysis allows investors to separate their thoughts from their emotions. That can be useful during days when the market drops more than 200 points.

But fear is such a strong emotion that it can also make people turn on one another. Which is exactly the point that Rod Serling made in his classic Twilight Zone episode, called “The Monsters Are Due on Maple Street”, which first aired in March 1960.

The show began with neighborhood kids playing outdoors one summer evening on Maple St. There comes a loud roar, and all the lights and phones go out. When one adult tries unsuccessfully to start his car only to have it turn itself on as he walks away from it, the others look at him suspiciously. Then the lights turn on in one of the houses, and the parents and kids look in panic at the owner of that house. As their fear mounts, one of the loud-mouthed neighbors shoots a stranger walking toward them on the street. He breaks down and blames one of the little boys for all the trouble, saying, “Look, I swear it isn’t me! But I know who it is! I know who the monster is!”

Then the episode concludes with two voices discussing their experiment:

Alien #1: Understand the procedure now? Just stop a few of their machines, and radios, and telephones, and lawnmowers, throw them into darkness for a few hours and then sit back and watch the pattern.
Alien #2: And this pattern is always the same?
Alien #1: With few variations. They pick the most dangerous enemy they can find. And it’s themselves. All we need do is sit back and watch.
Alien #2: Then I take it that this place, this “Maple Street,” is not unique?
Alien #1: By no means. The world is full of Maple Streets. And we’ll go from one to the other and let them destroy themselves. One to the other ... One to the other ... One to the other ...

In either a greedy world or a world of worry and fear, the markets are not completely inexplicable. Students of Elliott wave analysis [Ed: Or any effective technical analysis system] can learn how to keep a grip on their own fear or greed and see what is really happening in the major financial and commodities markets.

AMERICA IN THE TIME OF EMPIRE

All great empires and nations decay from within. By the time they hobble off the world stage, overrun by the hordes at the gates or vanishing quietly into the pages of history books, what made them successful and powerful no longer has relevance. This rot takes place over decades, as with the Soviet Union, or, even longer, as with the Roman, Ottoman or Austro-Hungarian empires. It is often imperceptible.

Dying empires cling until the very end to the outward trappings of power. They mask their weakness behind a costly and technologically advanced military. They pursue increasingly unrealistic imperial ambitions. They stifle dissent with efficient and often ruthless mechanisms of control. They lose the capacity for empathy, which allows them to see themselves through the eyes of others, to create a world of accommodation rather than strife. The creeds and noble ideals of the nation become empty cliches, used to justify acts of greater plunder, corruption and violence. By the end, there is only a raw lust for power and few willing to confront it.

The most damning indicators of U.S. national decline are upon us. We have watched an oligarchy rise to take economic and political power. The top 1% of the population has amassed more wealth than the bottom 90% combined, creating economic disparities unseen since the Depression. If Hillary Rodham Clinton becomes president, we will see the presidency controlled by two families for the last 24 years.

Massive debt, much of it in the hands of the Chinese, keeps piling up as we fund absurd imperial projects and useless foreign wars. Democratic freedoms are diminished in the name of national security. And the erosion of basic services, from education to health care to public housing, has left tens of millions of citizens in despair. The displacement of genuine debate and civil and political discourse with the noise and glitter of public spectacle and entertainment has left us ignorant of the outside world, and blind to how it perceives us. We are fed trivia and celebrity gossip in place of news.

An increasing number of voices, especially within the military, are speaking to this stark deterioration. They describe a political class that no longer knows how to separate personal gain from the common good, a class driving the nation into the ground.

“There has been a glaring and unfortunate display of incompetent strategic leadership within our national leaders,” retired Lt. Gen. Ricardo S. Sanchez, the former commander of forces in Iraq, recently told the New York Times, adding that civilian officials have been “derelict in their duties” and guilty of a “lust for power.”

The American working class, once the most prosperous on Earth, has been politically disempowered, impoverished and abandoned. The corporations that orchestrated the flight of jobs abroad and the abolishment of workers’ rights, control every federal agency in Washington, including the Department of Labor. The Democratic and Republican Parties now take corporate money and do the bidding of corporate interests.

Philadelphia is a textbook example. The city has seen a precipitous decline in manufacturing jobs, jobs that allowed households to live comfortably on one salary. The city had 35% of its workforce employed in the manufacturing sector in 1950, perhaps the zenith of the American empire. 30 years later, this had fallen to 20%. Today it is 8.8%. Commensurate jobs, jobs that offer benefits, health care and most important enough money to provide hope for the future, no longer exist. The former manufacturing centers from Flint, Michigan, to Youngstown, Ohio, are open sores, testaments to a growing internal collapse.

The United States has gone from being the world’s largest creditor to its largest debtor. As of September 2006, the country was, for the first time in a century, paying out more than it received in investments. Trillions of dollars go into defense while the nation’s infrastructure, from levees in New Orleans to highway bridges in Minnesota, collapses. We spend almost as much on military power as the rest of the world combined, while Social Security and Medicare entitlements are jeopardized because of huge deficits. Money is available for war, but not for the simple necessities of daily life.

Measuring the strength of the state in military terms is fatal. It leads to a growing cynicism among a disenchanted citizenry and a Hobbesian ethic of individual gain at the expense of everyone else. We leave the fighting and dying mostly to our poor and hired killers. No nationwide sacrifices are required.

It all amounts to a tacit complicity on the part of a passive population. This permits the oligarchy to squander capital and lives. It creates a world where we speak exclusively in the language of violence. It has plunged us into an endless cycle of war and conflict that is draining away the vitality, resources and promise of the nation.

It signals the twilight of our empire.

Pat Buchanan’s Day of Reckoning : The late, great America?

Pat Buchanan is too patriotic to come right out and say it, but the message of his new book, Day of Reckoning, is that America as we have known her is finished. Moreover, Naomi Wolf agrees with him. These two writers of different political persuasions arrive at America’s demise from different directions.

Buchanan explains how hubris, ideology, and greed have torn America apart. A neoconservative cabal with an alien agenda captured the Bush administration and committed American blood, energy, and money to aggression against Muslim countries in the Middle East, while permitting America’s domestic borders to be overrun by immigrants and exporting the jobs that had made the U.S. an opportunity society. War and offshoring have taken a savage economic toll while open borders and diversity have created social and political division.

In her new book, End of America: Letter of Warning to a Young Patriot, Wolf explains America’s demise in terms of the erosion of freedoms. She writes that the 10 classic steps that are used to close open societies are currently being taken in the U.S. Martial law is only a declaration away.

The Bush administration responded to September 11 by initiating military aggression in the Middle East and by using fear and the “war on terror” to implement police state measures at home with legislation, presidential directives, and executive orders. Overnight the U.S. became a tyranny in which people could be arrested and incarcerated on the basis of unsubstantiated accusation. Both U.S. citizens and non-citizens were denied habeas corpus, due process, and access to attorneys and courts. Congress gave Bush legislation establishing military tribunals, the procedures of which permit people to be condemned to death on the basis of secret evidence, hearsay, and confessions extracted by torture. Nothing of the like has ever been seen before in the U.S.

The cancer might have metastasized if the Guantanamo detainees had actually been the dangerous terrorists and enemy combatants that the Bush regime declared them to be. Had the administration actually possessed evidence against the detainees, the Bush regime might have succeeded in dispensing with the Constitution. Conviction of the detainees could have led to what Wolf calls a “fascist expansion.” Following the exercise of its new powers, the regime could have broadened the definition of terrorist to include the regime’s critics, thus pulling citizens in general into tribunals devoid of civil liberty protections.

It could still turn out this way in the event of another 9-11 attack, whether real or orchestrated. But momentarily the drive toward tyranny has been blunted, because the vast majority of detainees turned out to be hapless individuals sold into American captivity by warlords responding to the bounty the U.S. paid for “terrorists”.

In Stalinist Russia or Nazi Germany, the absence of evidence would not have mattered as the judicial system produced the results demanded by the tyrants. However, the U.S. military had not been sufficiently corrupted for the Bush regime’s Guantanamo agenda to succeed. Andy Worthington’s recently published book, The Guantanamo Files: The Stories of the 759 Detainees in America’s Illegal Prison, proves that the regime’s claim that it had hundreds of dangerous terrorists at Guantanamo was just another Bush administration lie.

Currently, support for Bush, Cheney, and the neoconservative agenda is low. However, Congress, the press, and elections have proven to be feeble opponents of the Bush regime’s drive toward war and tyranny. It remains to be seen whether the regime has sufficient credibility or audacity to initiate war with Iran or a false flag attack that would revive the fascist expansion of which Naomi Wolf warns.

The Bush administration has been a catastrophe. Its failures are unprecedented. Energy prices are at all time highs. The U.S. is deeply in debt and dependent on foreign creditors. The dollar has lost 60% of its value against other tradable currencies, and its reserve currency status, the basis of American power, is in doubt. As the ladders of upward mobility have been dismantled and the middle class struggles and fails, America is left with a few rich and many poor. America’s reputation and credibility are damaged perhaps beyond repair. Congress and the press have enabled the executive branch’s disregard of the Constitution and civil liberty. The U.S. is mired in two lost wars which are pushing Lebanon and nuclear-armed Pakistan into deepening political crises.

As Buchanan concludes, “Our day of reckoning is at hand.”

Leaderless and clueless America heads for the trash can of history.

In new books (see above), writers as disparate as Naomi Wolf and Pat Buchanan conclude that America as we know her is disappearing. Both writers hope, but are not confident, that enough Americans will catch on in time to find the leadership to pull America back from the brink.

If polls are reliable, a majority of Americans are dissatisfied with President Bush and Congress. However, Americans are far short of Wolf and Buchanan’s grasp of our peril. Americans are unable to connect their dissatisfaction with the current political leadership with their choice of new leaders. All polls show that Hillary Clinton is far in the lead for the Democratic presidential nomination and Rudy Giuliani is far in the lead for the Republican nomination. These are the only two candidates guaranteed to be worse than Bush/Cheney.

Both Hillary and Rudy are committed to the war. Both refuse to rule out expanding the war to Iran and beyond. Both are totally in the pocket of the Israel Lobby. Both defend the police state measures that “protect us from terrorism.” And neither gives a hoot for the U.S. Constitution and the civil liberties it guarantees. The Republican Giuliani is likely to overturn the Second Amendment even quicker than the Democrat Hillary.

Both Hillary and Rudy are creatures of ambition, not of principle. Both are one up on Karl Marx. Marx said truth serves class interests. For Hillary and Rudy, truth is what serves their individual interests. They both wear black hats, and the horse they ride is called power.

Obviously, the American people do not have a clue. They are not up to the challenge. It is only a matter of time before America succumbs to the plutocracy, against which Warren Buffet recently warned Congress, or the fascist tyranny that Naomi Wolf sees in our future.