W.I.L. Offshore News Digest for Week of May 26, 2008

OFFSHORE BANKING: IS IT A LEGITIMATE OPTION?

This is an excellent introduction to offshore banking from online investment newsletter NuWire Investor. They do not warn you that an offshore bank account of any size (over $10,000 in value at any point) does not provide much privacy, as its existence must be reported to the U.S. Treasury. They do succinctly cover the major reasons people go offshore: asset protection, privacy, and insulation from home country financial system troubles -- reasons that W.I.L. has been advocating since its inception.

Offshore banking often conjures up visions of corrupt executives avoiding taxation or drug dealers and other unsavory characters using offshore accounts to keep their dubious dealings hidden. But this is not necessarily the case. Certainly some people use offshore bank accounts in unethical ways, just as there are those who abuse loopholes in tax laws or engage in corrupt foreclosure rescue scams, but having an offshore bank account does not immediately brand someone a criminal. In fact, offshore banking can potentially be beneficial for investors looking to protect their assets, run a business while maintaining anonymity or avoid unreliable banking systems at home.

Offshore banks are often, but not always, located in countries providing no-tax or low-tax environments, known as tax havens. The term "offshore bank" simply refers to a bank located in a country other than the one in which the account holder resides.

Many people may legitimately open an offshore bank account. "It's surprising how most people think [tax evasion] is the number one motivation, but I'd say 80 to 90 percent of people who call are interested in protecting their assets from lawsuits or some other threat. Or they just want the privacy of banking [offshore]," Doug Booth, a paralegal with Offshore Legal, a law firm based in Panama, said.

The cited percentage is interesting, even if it is not rigorously derived. Under "some other threat" we would be more direct, and say "from your home country's rapacious government."

Wealthy businesspeople who want to get involved with a project and remain anonymous may choose to do so through an offshore corporation because of the privacy it offers. And diminishing confidence in the local economy may also be encouraging U.S. residents to move their money offshore.

Except that the privacy afforded by an offshore corporation is hardly absolute, as we discuss further below.

"As of late we've been getting a lot of people coming along who are very upset with the American banking system ... and they want to move their money to another system," Booth said.

We have been highlighting this as the #1 reason for going offshore for several years now -- see this page in Introduction to International Asset Protection

The primary benefits of an offshore bank account are privacy and asset protection. Account holders can create offshore corporations, open accounts in its name and make deposits and withdrawals through the corporation, which can make it virtually impossible for the account to be connected with the depositor. The IRS considers foreign corporations to be a legitimate way to use offshore bank accounts, as long as the corporation is used for "valid business purposes."

Looking through the rhetoric and at the rules themselves, a valid business purpose in the IRS's eyes would be a business that does actual buying and selling of goods or services. Income held by Controlled Foreign Corporations that is purely passive in nature (details are in the regulations) is passed directly on to the shareholders for tax purposes. And in any case, foreign corporations are not great privacy vehicles when directly held by U.S. shareholders. See this W.I.L. publication for more details.

Swiss bank accounts have become so well known that Switzerland is likely the first place to spring to mind when thinking of offshore banking, but many jurisdictions offer such services. Countries such as Panama, Bermuda, Costa Rica and the Cayman Islands are all used for offshore banking. When selecting a bank at which to open an offshore account, there are several things investors should bear in mind. Being able to do online banking and to send and receive wire transfers are critical when conducting one's affairs from abroad. Booth also advises considering whether one prefers a multinational bank or a local bank.

"A multinational bank has the stability and power behind it and has a lot of conveniences. But ... if pressure is applied you never really know if they are going to hold up, given that they are located onshore as well. Multinational banks have $20 to $80 billion in assets. Banks only in Panama are around the $1 billion mark. They are smaller banks ... but you get the security of knowing no one can pressure them," Booth said.

Our thoughts exactly.

Offshore bank accounts are not for everyone. "It's not as convenient as banking down the street," Booth said. "You can't pay your North American bills from your [offshore] bank account; you need to wire the money in to pay bills, or use a card to pay for them.

Investors considering putting their money into an offshore account should carefully weigh the pros and cons, as well as potential legal issues, before deciding whether or not it is the right decision for them and their money. Diverting and concealing income into offshore accounts to avoid taxation in the U.S. is considered an abuse of offshore banking. Taxpayers and promoters of illegitimate offshore arrangements could be subject to civil and/or criminal penalties, according to the IRS.

Promoters such as the ex-UBS banker who was indicted by the U.S. earlier this month. See posting here.

"We specifically don't encourage people to come offshore for tax-related matters," Booth said. "Panama has been a privacy jurisdiction for a long time. It is built right into the culture, so it is an authentic privacy jurisdiction and a lot of people ... take advantage of that. There are several sectors we do not take: Gambling, pornography and pharmacy. Those areas we don't even touch."

When considering opening an offshore bank account, it is vital that investors select a law firm in the country of choice to ensure that everything is taken care of in a thorough and legal fashion. In Panama, for example, Booth warns of so-called company mills. These mills churn out offshore companies, but are not always reliable. "The real problem with dealing with those people is you lose your attorney client privilege," he said. "That means someone ... has your information and is not held by attorney client privilege. All the security in the world is not going to protect you if the person talks."

As the Liechtenstein bank data theft incident, which has been prominent in offshore news and conversation this year, shows, your agent being forced to talk is not the only issue. You also want to know he will not be bribed into turning over your vital details.

Investors need to thoroughly research available options, as well as the legality of the course they wish to pursue, before deciding whether or not offshore banking is the right choice. Attorneys and accountants can provide critical counsel during the process, and investors should be as well-advised as possible before making any decisions.

U.S. OFFSHORE ACCOUNT HOLDERS BITE THEIR NAILS

Repercussions continue from the theft of client data from a Liechtenstein bank, and its subsequent route through Germany to, among other countries, the U.S. It has put the fear of God in all offshore financial account holders who were relying on secrecy to avoid expose of tax evasion or failure to report an offshore account, whether or not they hold accounts in Liechtenstein. The whole affair has further revealed what already should have been obvious: relying on secrecy alone is a very weak strategy for obscuring that which you wish to avoid having discovered.

The newly advertised chink in the secrecy armor -- disgruntled, or greedy and amoral, ex-employees of financial institutions -- is only the latest one. Countries and financial institutions have always been given to caving over time, if the pressure is kept up long enough. Similar to what environmentalists say when fighting developers, the government seeking information only has to win once while the person trying to protect themself has to keep on winning forever. That alone should militate against relying on secrecy and for coming up with a backup component to one's strategy.

As government officials intensify a multinational crackdown on offshore bank accounts, many wealthy Americans who use them to illegally shield income are facing a difficult decision: whether to turn themselves in -- and if so, how.

"People are having trouble sleeping at night," says Charles Rettig, a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, California. "They don't want to go to prison."

Lawyers advising tax dodgers are saying their clients are struggling to decide among several alternatives. They can confess and plead for mercy. They can quietly file amended tax returns, pay up, make other required disclosures and hope overworked government prosecutors will not follow up. Or they could choose to do nothing and pray their names will not turn up.

Tax dodgers are facing these stark choices as major cracks emerge in what once appeared to be an impenetrable wall of secrecy surrounding bank accounts in such well-known havens as Liechtenstein and Switzerland. While officials have launched many similar campaigns in the past, their latest efforts are attracting widespread attention because they are coming from so many different directions.

"Nothing is secret anymore," says Cono Namorato, a lawyer at Caplin & Drysdale in Washington and a former official at the IRS and the Justice Department. "No individual should take any comfort in relying on any country's so-called bank-secrecy laws."

Last week, the U.S. charged a former UBS AG banker and a Liechtenstein consultant with helping clients avoid taxes. One name already has surfaced: California real-estate developer Igor Olenicoff, who pleaded guilty late last year to filing a false 2002 tax return. U.S. officials are expected to press UBS, a large Swiss financial-services company, to disclose the names of wealthy Americans who may have used its services to evade taxes.

Since UBS is a money center bank with an major presence in the USA, the U.S. has plenty of assets and personel it can hold hostage as leverage with UBS. Be sure your offshore provider has no legal or physical presence within your home country, wherever that may be.

The U.S. and other countries are also probing Liechtenstein's role as a haven for tax cheats. The IRS has confirmed it is investigating more than 100 U.S. taxpayers in connection with accounts in Liechtenstein. Those names have not been made public. Joining the U.S. in the investigation are Australia, Canada, France, Italy, New Zealand, Sweden and the United Kingdom, the IRS said.

Once the Liechtenstein bank ex-employee sold client data to Germany, the data was passed on to the U.S. and the other countries mentioned. For some reason, no low-tax countries showed up asking for a list of their citizens who might have been bank clients.

If you have an offshore account with unreported income, you "should definitely be worried," says Mr. Rettig, who represents a number of clients with such accounts. And if you have an account in Liechtenstein, you should "lawyer up immediately."

Offshore tax evasion costs an estimated $100 billion in lost revenue each year, said Sen. Carl Levin (D-Michigan), the chairman of the U.S. Senate Permanent Subcommittee on Investigations, which has launched its own probe. He has introduced legislation designed to combat offshore secrecy and end the use of havens by Americans dodging taxes. A staffer confirms the investigation has begun but declines to elaborate.

IRS officials also are turning up the heat. "Combating offshore tax avoidance and evasion are high priorities for the IRS," says IRS Commissioner Doug Shulman. "Recent events show there is no safe hiding place for the proceeds of tax avoidance and evasion. Anyone with hidden income and gains would be well-advised to make a prompt and complete disclosure to the IRS."

A law enacted late in 2006 authorized the IRS to pay sharply higher rewards to informants in cases involving large amounts of money. In some cases, the reward can be as high as 30% of whatever the IRS collects. Officials say valuable tips already have poured in because of this law.

"Some clients are very concerned," says Bryan Skarlatos, a lawyer at Kostelanetz & Fink in New York and chairman of the American Bar Association tax section's committee on civil and criminal tax penalties. While there still are some "bank-secrecy jurisdictions," he says, "none of them are as safe as they used to be, and none are ironclad."

In some cases, Mr. Skarlatos is talking to IRS officials about arranging for clients to come in from the cold, confess and arrange full payment -- in the hopes that prosecutors won't bring criminal charges. But he and other lawyers agree this "voluntary disclosure" approach isn't always the best choice.

Here are the pros and cons of several options -- short of fleeing the country altogether -- facing scofflaws:

• The ostrich approach. Bury your head in the sand and hope the storm clouds will blow away without your being caught. This might work if you're reasonably confident your name won't be discovered. But lawyers say the odds of getting caught have grown rapidly because of the growing number of nations pursuing tax cheats and the increased willingness among them to swap information.

"There are some people who are just brazen and think the government will never locate them," says Mr. Rettig, the tax attorney. But "doing nothing and hoping to not be located is not a viable option. Their confidence is misplaced. The issue is when the government will locate them, not whether. And when they are discovered, the house of bricks will literally fall on the person." Ostriches also risk getting hit with very stiff penalties -- and possible criminal sanctions -- just for failing to report foreign financial accounts.

• Make amends quietly. Another option is to file amended returns, using Form 1040X. Some lawyers suggest filing several years of amended returns all at once, while others prefer to send each year's return separately.

Whatever the case, one lawyer says the amended-return approach is usually the best idea because filing and paying everything owed often can help ward off criminal prosecution, especially if the authorities were previously unaware that the client had done anything wrong. But it's certainly not a risk-free approach since the client is admitting that a previous tax return was erroneous, says Mr. Skarlatos.

• Surrender outright. Some people have hired experienced tax lawyers to test the waters with the IRS, initially on an anonymous basis, to see what might happen if they turn themselves in and pay everything they owe -- in the hopes of avoiding jail. This is sometimes known as a "noisy disclosure," as opposed to the quieter approach of filing amended returns and hoping for the best.

"Most of our clients decide to opt for a formal or 'noisy' voluntary disclosure, notwithstanding its complexity, because they want the comfort of sleeping well at night at the conclusion of the process without worrying about future IRS actions," says Mark Matthews, a lawyer at Morgan, Lewis & Bockius in Washington and a former official at the IRS and Justice Department.

But some people are not eligible. Among them are those with "illegal source" income, such as money from bribes or securities fraud. A voluntary disclosure "probably makes sense" for someone who has "only legal sources of income, is not under audit or investigation and whose noncompliance is not likely to be imminently discovered" and who is "prepared to pay or make arrangements" to pay what they owe, Mr. Matthews says.

As one New York lawyer puts it, the IRS is more sympathetic to people who have seen the light, rather than the light seeing them.

An IRS spokesman cautions that a voluntary disclosure "will not automatically guarantee immunity from prosecution," but it "may result in prosecution not being recommended."

EUROPE, U.S. BATTLE SWISS BANK SECRECY

After fighting Switzerland's banking secrecy laws for decades, European finance ministers are about to receive support from the United States. Investigations into major Swiss bank UBS and a proposed law against tax havens are ratcheting up pressure against the system.

We recall during our adolescence seeing a made-for-TV movie titled "The Birdmen", where some allied prisoners in a German POW camp high in the Alps were constructing a glider in order to help one important prisoner escape to Switzerland and freedom -- a mere 12 miles (or some small number of that order) away. (We recall it being a pretty decent movie, by our then young mind's standards. And goodness gracious, there is a fan website devoted to the movie!) Then as now, Switzerland stood out as a symbol backed with substance -- an island of relative freedom surrounded by state-sponsored aggressors against freedom.

Now the war is being fought with words and economic pressure rather than bullets and bombs, but Switzerland's relative isolation is no less stark. Again the surrounding Continental nations, with a few small exceptions, are ganging up on them -- this time with help from the U.K. and the U.S. as well. Rather than occupy the Swiss territory, the anti-Swiss cabal means to achieve an economic occupation of sorts by having the Swiss hobble their world-class financial sector, which constitutes 15% of the country's GDP, in order to serve the aims of the cabal.

The German publication Spiegel (which translates to "mirror") has published a significant article on the efforts to break Switzerland's financial secrecy laws. We will cover it in two parts, this week and next.

Martin Liechti, a senior executive with the private banking division of major Swiss bank UBS, worked through his business appointments in New York with his usual efficiency. A subsequent trip to the Bahamas for a meeting in late April was also pure routine. In the Caribbean paradise, Liechti was scheduled to attend a supervisory board meeting of UBS (Bahamas) Ltd., and to take a closer look at the options for doing business with America's super-rich, including parking their money in Swiss trust accounts. But Liechti, a man known for his abrasive manner, never arrived in the Bahamas. U.S. officials abruptly ended his trip when he was about to change planes in Miami. Since then, Liechti has been barred from leaving the country because the American authorities are investigating his employer for allegedly helping clients to evade taxes.

Liechti's former colleague Bradley Birkenfeld, as well as Mario Staggl, an executive with a trust company in Liechtenstein, are under indictment for allegedly helping American billionaire Igor Olenicoff evade taxes. According to the indictment, a fortune of about $200 million (€129 million) was sheltered from tax authorities "in secret bank accounts in Switzerland and Liechtenstein." Prosecutors allege that Staggl's attorney in Gibraltar even helped Olenicoff hide the details of his ownership of a "147-foot yacht."

The accused are alleged to have forged special forms that Swiss banks use to report their U.S. customers' capital gains to the ... IRS. Both Birkenfeld and Staggl have declined to comment on the charges.

Last week we speculated about what the UBS employees had done that was obviously illegal, versus what the IRS might have objected to for being overly aggressive. It looks like they clearly stepped over the line. Forging forms would be illegal in Switzerland, never mind the U.S.

"UBS is walking a thin line. On the one hand, it has to show a willingness to cooperate. On the other, it is trying to protect its customers' banking secrets," says Robert Heim, an attorney in New York and a former investigator with the US Securities and Exchange Commission. "The Justice Department will urge the two to cooperate. The more information they provide, the less severe their penalties will be." He expects that their testimony will soon lead to further indictments and arrests. "This is a very bad development for UBS."

According to Heim, the U.S. is by no means the only place where Swiss high finance and the country's banking secrecy laws are coming under growing pressure. Foreign authorities around the globe are increasingly taking sharper action against tax evaders. Swiss financial institutions, often in tandem with partners in Liechtenstein, play a central role in helping the ultra-rich avoid paying billions in taxes.

An almost unimaginable fortune of more than €3 trillion ($4.7 trillion) is currently sitting in Swiss bank accounts. The discreet Swiss allow vast amounts of money to disappear into trusts, offshore companies and bank accounts, money that is often protected by Switzerland's banking secrecy laws.

Looks like it is time to let the smearing begin. No distinction is made between those attempting to hide ill-gotten gains and those who are taking legitimate measures to protect their assets and privacy. When someone makes an investment in a non-public company, does that money "disappear" into the company? This lack of differentiation is what you expect from the mainstream press -- in the pockets of and scribes for the state and its backers.

Because of these laws, foreign officials on the hunt for untaxed riches are often forced to end their quests at the Swiss border -- to the anger and dismay of the world's finance ministers, and others. Rudolf Elmer, a controversial former executive with the private bank Julius Bar, condemned the dubious methods employed by Switzerland's financial institutions at a press conference in Berlin last week. He sharply attacked his native Switzerland, accusing it of engaging in "criminal support of economic crime."

Many politicians agree. The most recent challenge comes from French Finance Minister Eric Woerth, who plans to dry up the profit sources of Alpine "tax robbers," as he announced in a recent interview. The Frenchman has called for an initiative against tax havens and wants Switzerland to guarantee "maximum transparency and the exchange of information."

Woerth also plans to examine the black list of the OECD because, as he claims, many countries have only been removed from the list thanks to "vague promises." Woerth says that he has already discussed the matter with German officials.

One man he can count on as an ally in his campaign against tax havens is German Finance Minister Peer Steinbruck. The Germans are especially fond of parking their untaxed assets in foreign tax shelters. According to a study based on data from DSTG, the German national tax collectors' union, and the Bundesbank, Germany's central bank, close to €500 billion ($775 billion) in untaxed German assets are in foreign tax shelters, with fully 1/3 of that amount on deposit in accounts in banks in Swiss cities like Geneva, Zürich and Lugano.

Former German Finance Minister Hans Eichel is a vocal critic of Switzerland's special status, and he is fond of appearing on Switzerland's prime-time television talk shows, where he sharply attacks Swiss banking secrecy. "A person who receives stolen goods is no better than a thief," he says.

Which would mean all governments are no better than thieves. Government employees are not known for their keen senses of irony.

Nevertheless, Eichel's comments are greeted with complete incomprehension. Despite the rallying cries of Eichel -- a member of Germany's center-left Social Democratic Party -- such as "tax evasion is committing theft against the people," the majority of Swiss continue to support banking secrecy.

One of the system's strongest advocates is a senior executive with Switzerland's oldest private bank. For Konrad Hummler, a partner in Wegelin & Co., German tax evasion is a legitimate defense by citizens attempting to "partially escape the current grasp of the administrators of a disastrous social welfare state and its fiscal policies."

"Swiss-style saving outside the system" is something to which not only the wealthy, but also productive small and mid-sized businesses are entitled. "These people must be protected," says Hummler.

Banking secrecy as an act of humanitarian compassion? More than anything, Switzerland's system of banking secrecy amounts to a very good business. It is considered the most controversial model of success in the history of global high finance. In past decades, the banking secrecy that is protected by law in Switzerland has acted like a magnet, drawing in trillions of euros and contributing to the meteoric rise of the small Alpine country's financial sector.

That the Swiss have done well by doing good cannot be denied.

Once insignificant boutique banks transformed themselves into banking industry giants. Despite suffering record losses as a result of [their willing participation in] the U.S. subprime mortgage [mania] crisis, banks like UBS and Credit Suisse are still seen as top choices for portfolio managers. The entire industry makes up 15% of Switzerland's GDP. "It makes us fat, but impotent," top banker Hans J. Bär complained a few years ago in his memoirs.

From small and mid-sized businesses to athletes to actors, everyone values the Swiss authorities' policy of refusing to respond to inquiries from foreign tax investigators. Those seeking a place to park untaxed income have nothing to fear in Switzerland. Their account information is kept under lock and key because tax evasion is not considered a criminal offence in the country. Foreign governments can only expect assistance from the Swiss when it comes to tax fraud, such as when their tax authorities are deceived with falsified documents like bogus company accounts.

Which the accused UBS executives apparently did.

A recent incident at Credit Suisse illustrated how routine and matter-of-fact it is for Swiss banks to help their foreign clients avoid paying taxes. Because of embezzlement of customer money, one of the bank's customer advisors was summoned to appear in court in Zurich and divulge his employer's practices. At the bank's offices on downtown Zurich's posh Paradeplatz square, the defendant and his coworkers helped manage the assets of customers living in Germany, including a wealthy, elderly woman. According to the indictment, house visits with the client were as much a part of Credit Suisse's service as "tax optimization." The banker allegedly deposited the proceeds of real estate sales as cash into trust accounts, in an attempt to "make it impossible to trace the source of the funds," the prosecutor writes.

Naturally, the Zurich court refused to overrule the country's banking secrecy laws. The names and addresses of the injured parties were not divulged -- neither in the indictment nor in the courtroom.

To be continued next week ...

THE COLD PRICE OF HOT BLOOD

A devastating new book reveals that Iraq will cost the U.S. at least $3 trillion ($10,000 per adult, child, and baby).

Make no mistake about it. The United States was headed for a financial fall long before 9-11 and the second Iraq invasion. We wrote the original version of this before 9-11. The whole credit-inflation/pass-the-depreciating-buck game could not continue forever, ergo it was going to come to a stop someday. The Iraq war merely accelerated reckoning day. Pissing away a couple of year's worth of aggregate corporate profits to decrease security, when that money was badly needed to avoid further degradation of the capital stock, will do that to an economy.

Every nation that goes to war makes that war its religion. Wars are always holy, necessary and sacrosanct. That is why asking how much a war costs is blasphemous. It is like asking how much God is worth.

Hence the Bush administration's predictably apoplectic reaction to Joseph Stiglitz and Linda J. Bilmes's new book, The Three Trillion Dollar War: The True Cost of the Iraq Conflict. "People like Joe Stiglitz lack the courage to consider the cost of doing nothing and the cost of failure," White House spokesman Tony Fratto declaimed. "One can't even begin to put a price tag on the cost to this nation of the attacks of 9/11. It is also an investment in the future safety and security of Americans and our vital national interests. $3 trillion? What price does Joe Stiglitz put on attacks on the homeland that have already been prevented? Or doesn't his slide rule work that way?"

Since the Iraq war has not done anything except endanger the future security of Americans and jeopardize our vital national interests, it is tempting to reply that Fratto's slide rule is the one that is busted. But his overblown rhetoric refutes itself. When official spokesmen accuse a Nobel Prize-winning economist of cowardice, you know that a direct hit has been scored.

As far as I know, Stiglitz and Bilmes's landmark book is the first to break the taboo against counting up the costs of an ongoing war. Not only does it reveal the staggering actual cost of Bush's war of choice -- at least $3 trillion -- it details what we could have done with that money if we had spent it more wisely. The book also argues that Iraq is partly responsible for the nation's current economic crisis: The Federal Reserve Bank under Alan Greenspan tried to offset the adverse effects of the war by lowering interest rates, which helped cause the subprime debacle when interest rates inevitably rose.

The import of their insistence on looking at the war's cost now, while it is still in progress, cannot be underestimated. By forthrightly acknowledging that armed conflict should be subject to a cost-benefit analysis, they implicitly puncture the sacrosanct aura of patriotism surrounding war -- and make it harder for governments to launch future wars as ill-considered as the present one we find ourselves in.

To put [the] $3 trillion in perspective, it is worth comparing it to the cost estimates Bush officials bandied about before the war began. The authors present a damning Nightline transcript in which one official, Andrew Natsios, blandly told Ted Koppel that Iraq could be completely reconstructed for only $1.7 billion. (With the war now costing $12.5 billion a month, Natsios's estimate would have been accurate if he had stipulated that it would pay for four days' worth of reconstruction. Which, considering the delusional nature of most of the Bush administration's pre-invasion estimates, may have been how long it thought it would take to rebuild the country.) Other officials settled on a figure of $50 billion to $60 billion. Larry Lindsey, Bush's economic advisor, went way out on a limb, suggesting that the war might cost $200 billion -- a figure derided by then-Secretary of Defense Donald Rumsfeld as "baloney." Rumsfeld refused even to offer a range of estimates, saying, "I've already decided that. It's not useful." He was right: It would not have been useful for those ginning up support for a war to predict that it might cost $3 trillion.

In 2005, the Congressional Budget Office estimated that the war had so far cost about $500 billion. That figure was obviously far higher than initial Bush administration estimates, but Stiglitz and Bilmes suspected it was still much too low. After researching the issue, they published a paper in January 2006 that conservatively estimated that the true cost of the war would be between $1 trillion and $2 trillion. Even at the time, they regarded that estimate as excessively conservative, but did not want to appear extreme.

Stiglitz and Bilmes's book, which is based on that paper, doubles their earlier estimates to $3 trillion, making Iraq the second most expensive war in U.S. history, trailing only World War II, which cost an adjusted $5 trillion (and in which 16.3 million Americans served in the armed forces, with 400,000 dying). But the authors regard even their new figure as conservative: Their estimates range from $2 trillion, in the best-case scenario in which the U.S. withdraws all combat troops by 2012 and fewer veterans need medical and disability pay, to more than $5 trillion. Add in the cost to the rest of the world, and the price tag could exceed $6 trillion

As the authors detail, the Bush administration has used every trick in the book to hide the real price tag -- concealing non-combat casualty figures, keeping double sets of books, not factoring in support troops, and allowing the Pentagon to produce budgets so contradictory, obscure and incompetently presented that there is literally no way to determine how much it has spent. The authors had to use the Freedom of Information Act to obtain much of the information in their book.

LIFE AFTER FIDEL CASTRO IS MORE COMFORTABLE

A little capitalism and freedom goes a long way.

Since Fidel has formally relinquished his position as first among equals in Cuba to brother Raul, the question has been whether this would result in any policy changes of significance. Apparently the answer is yes.

Similar to the first small reforms initiated by Deng Xiaoping following Mao's death and the purge of the Gang of Four, Raul has allowed farmers some small discretion in how they run their operations. If substantial increases in agricultural output follow, restrictions on other small businesses will undoubtedly be relaxed piecemeal as well. Before you know it, Europe and the U.S. might decide to stop interfering with farmers and businesses as well. You never know where things will lead, once a trend is in motion.

It has been 100 days since Fidel Castro relinquished power and his brother, Raul, took over as president of Cuba. At the time, few felt that this marked a significant political change in the future of the Caribbean nation. After all, he had vowed to rule the country in line with Fidel's communist principals.

But commander-in-chief Raul, now 76, has surprised many of his people with the introduction of economic reforms that promise to boost agricultural output and bring an end to complaints over food shortages.

He has also eased restrictions on the purchase of "luxury" electrical goods -- previously unobtainable computers, mobile phones, microwave ovens and DVD players. Cubans are even allowed to visit hotels that were once reserved for foreigners. This was a deeply unpopular restriction that created a apartheid between resentful locals and tourists who were hogging the island's best beaches. Meanwhile, rumours are busily circulating that restrictions on foreign travel could soon be lifted.

Few Cubans can, in reality, afford to buy such goods, or eat in a swanky hotel-restaurant where a main course costs the equivalent of the average worker's salary of £12 a month. Equally, other critics ask what is the point being allowed to own computers if internet access is still restricted.

But Raul's practical gestures have created a significant amount of goodwill and brought him breathing space as he attempts to grapple with a struggling economy damaged by a decades-long U.S. trade embargo and the inefficiencies of a highly centralized state-run system.

Agriculture is key to economic reform. Last year, Cuba spent more than $1.5 billion on food imports. Farmers have now been given more scope to decide how to use their land, which crops to plant and which supplies to buy. They are also being paid more by the government for certain products, such as potatoes, and can legally hire laborers for the first time.

If the attempts at agricultural liberalisation prove successful, then small business, self employment and co-operatives in the cities could follow. Already, in the commercial arena, changes are afoot: workers will soon be able to earn bonuses based on productivity and there will be no upper limit on salaries.

However, this has worried some professionals. Doctors, who under the Cuban communist system earn the same amount as factory workers, complain that they cannot be judged on productivity alone and will miss out on the new incentives.

Earlier this month President George W Bush dismissed the reforms as "cosmetic" -- since Raul took over there has been little sign of a thawing of relations between Cuba and its nearest neighbour. Bush went on to urge Cuba's new leader to free political prisoners and initiate democratic change.

"If Cuba wants to join the community of civilized nations, then Cuban rulers must begin a process of peaceful and democratic change and the first step must be the release of all political prisoners," he said. "This is the policy of the United States and it must not change until the people of Cuba are free," he asserted. ...

Dissidents in the country insist there has been no easing of the restrictions on freedom of speech. Earlier this month, a group of women demonstrating against the continued imprisonment of their husbands for speaking out against the regime were rounded up by police as they staged a peaceful protest.

Raul, though, has made one concession in this area. He has said that he will commute the death sentence to prison terms of between 30 years and life for all prisoners except those charged with serious terrorism offences. He did, however, take the opportunity to make it clear that the decision had not been taken due to international pressure.

FOR SALE: ONE ISLAND TAX HAVEN, ASKING PRICE £15 MILLION

Thinking about starting or joining a new country (recipe here), but do not fancy living on a platform in the North Sea? This may be your chance. The leasehold of miniature Channel Island Herm -- not the island itself -- is for sale.

Guernsey claims the right to approve the leaseholder, on the theory that it has "a responsibility to ensure any new Herm leaseholder retains the island's integrity." How far a new leaseholder could push towards true independence is not apparent, but its location in the tax haven Channel Islands is a good start.

For sale: tiny Channel Island. Includes own jail. One of the eight inhabited Channel islands off the northern coast of France has gone on the market, the estate agency handling the sale said.

Martel Maides, based on the island of Guernsey, said it was looking for a new buyer to take on the 40-year leasehold of Herm, about five kilometers away. "The island offers a beautiful place to live with a remarkable lifestyle, supported by a thriving tourist based business," reads a description on the firm's website.

"As well as a fine home at the top of the island , and the farmland, hotel, restaurant and tavern that we all know so well, the purchaser will also get a jail, an obelisk and a landing craft."

The island is just 2.4 kilometers long by 800 meters wide. But it includes a manor house, 13th century chapel, what is thought to be the world's smallest jail, farmland, white sandy beaches, pub and restaurants.

There is a hotel with no clocks, televisions or telephones, plus other facilities built up in the last 50 or so years include self-catering cottages, shops, a campsite and housing for 150 people. There are 50 permanent residents on the island. It is also a tax haven.

Adrian and Pennie Heyworth, who have run the island for the last 28 years, told the Guernsey Post newspaper they have decided to move on for private and family reasons. "Herm is great, but perhaps having had the Heyworth family for 28 years it's time for a change. Perhaps it needs new ideas," Adrian Heyworth was quoted as saying. "It needs someone with probably greater wealth than we have to keep pace with the expectations of tourists today."

Britain's Sunday Times said the island could be sold for £15 million. The Channel Islands are a British Crown dependency but are run independently and are not part of the UK. Queen Elizabeth II is head of state and is referred to by Channel islanders as Duke of Normandy.

Herm Island for sale

A 40-year leasehold on the property is on offer, following a decision to sell by the island's present owners. Pennie and Adrian Heyworth who presently administer the island have been responsible for its renovation and restoration following the occupation by Nazi forces between 1940 and 1945.

The island is now a popular destination for tourists during the summer months, when thousands of visitors make the short ferry journey across from the larger Channel Island, attracted by the unspoilt natural beauty and sandy beaches.

Millions of pounds have also been invested in upgrading and improving Herm's infrastructure and facilities, again making it more attractive to visitors. Facilities on the island now include self-catering cottages, a campsite, staff quarters and housing for 150 people. The White House Hotel and the Mermaid Tavern have also been extensively renovated and extended over the years.

Rupert Sweeting, of Knight Frank, who are one of two agents commissioned to carry out the sale, commented: "Herm is one of the most beautiful spots in Europe, it has long white beaches, undulating countryside, a safe harbour, wonderful woods, and the list goes on."

Herm Island also has the tax advantages of the Chanel Islands.

The island -- which saw its first settlers in the Neolithic age -- was part of the Duchy of Normandy prior to the William the Conqueror's invasion of England in 1066.

According to a BBC news piece on the sale, the island has been a British Crown Dependency since 1204 when King John lost Normandy and the islanders, many of whom had landed interests in England, decided to align themselves with the English.

For nearly three centuries, from the mid 1400s, it was a sporting reserve for governors of Guernsey, and stocked with pheasants, partridges, swans and rabbits for the wealthy gentlemen who sailed over to hunt, shoot and fish.

In more recent times, previous tenants have included Scottish author and nationalist Sir Compton Mackenzie, a Prussian prince, Trappist Monks, and 20th century British automobile pioneer Lord Perry, who was the first chairman of the Ford Motor Company in the UK.

BEAR STEARNS HEDGE FUNDS LOSE FIGHT TO SHIELD ASSETS FROM CREDITORS

Court rules on substance over form.

This case is interesting because the Bear Stearns hedge funds were formally based offshore, in the Cayman Islands, but front and back office operations were run out of New York. The two Cayman-based directors had no substantial involvement in operations. And thus when it came time to decide whether a part of the bankruptcy code the applied to cases involving a diversity of jurisdictions could be used by the funds, the U.S. court said no. Substantially, the funds were totally U.S. based.

The lesson is clear, and not just if you are running a hedge fund. You cannot depend on form alone to carry the day when a matter of substance is at stake.

Two bankrupt Bear Stearns hedge funds have lost their legal bid to have assets shielded from investors in the U.S. while the businesses are being wound down in the Cayman Islands.

In a ruling delivered on 22nd May and made public on 27th May, U.S. District Judge Robert Sweet in Manhattan denied protection from creditors under Chapter 15 of the U.S. Bankruptcy Code, which covers cross-border insolvencies, because the Cayman Islands were not their "center of main interest," upholding a decision by a lower court on the case.

Chapter 15 protection would have allowed the hedge funds to liquidate in the Cayman Islands while giving the funds a higher degree of protection from creditors in the U.S. Legal experts expect that the ruling will have a substantial impact on future bankruptcy cases where investment funds are based offshore, and there are fears that it could deter funds from registering in offshore jurisdictions such the Cayman Islands -- which is home to about 8,000 hedge funds -- and the British Virgin Islands.

"The process by which the financial problems of insolvent hedge funds are resolved appears to be of transcendent importance to the investment community and perhaps even to the society at large," Sweet wrote in the order.

While lawyers for the two hedge funds pointed out in the trial that they had two directors resident in the Cayman Islands, Judge Sweet argued that these directors "have not been shown to have had any substantial involvement in the business of the funds." Sweet added that furthermore, the investment manager for the funds was located in New York, as were its back office staff, its books and records, and all of the funds assets.

The two hedge funds in question ... invested heavily in collateralized loans backed by subprime mortgages. A large percentage of the funds' assets, most of which are in the U.S., had been repossessed by secured creditors, including Merrill Lynch and Bear Sterns itself, during the period before their bankruptcy. Bear Stearns is currently in the process of being acquired by JPMorgan Chase and Co.

BIG BROTHER’S VAULT FOR ALL NET USE, CALLS AND EMAILS

In the name of battling terrorism, the British plan to keep records of every email, phone call, or visit to a Web site. It is pointed out that an estimated 3 billion emails and 60 billion text messages are sent in Britain every day. Even with today's computing power and software, managing the resulting database will be no small challenge.

More daunting still will be the task of filtering through the data trying to discern legitimate threats. Given the tiny proportion of terrorists in the population at large, it is a statistical given that there will be a huge number of false positives generated no matter how "expert" the filtering system developed turns out to be. A formal demonstration of this idea can be seen here. So the whole idea is close to useless. But as the linked-to piece points out, however, the system will be quite useful for monitoring everybody. A second upside -- for contractors feeding at the trough, that is -- is that the system is bound to be expensive. Too bad for everyone else.

A digital vault containing information about every email, internet visit and phone call made in Britain is to be created in a European bid to battle terrorism. The plan, which will widen legislation governing the record-keeping responsibilities of telecommunications and internet companies, has alarmed civil libertarians who are already anxious about a proposed ID card scheme.

An estimated 3 billion emails and close to 60 billion text messages are sent throughout Britain every day, raising fears that the British Government will not be able to manage such a large store of information. A single database is also believed to be a far easier target for attack.

The Times in London has reported that Home Office officials have discussed the proposed national database plan with communications companies and that the legislation is to be outlined during the traditional November Queen's speech.

The Information Commissioner's Office has warned that Britain risks sleepwalking into a Big Brother society, while the Opposition argues the Government has a bad track record holding sensitive information and cannot be trusted. The plan comes in the wake of European Union demands for uniform record-keeping throughout Europe after the July 7, 2005, bombings in London.

Experts argue it is much simpler for police and counterterrorism specialists to retrieve information from a single source than to try to access hundreds of different companies.

UK DATABASE WOULD PROVIDE “ONE STOP SHOPPING” FOR IDENTITY FRAUD

If the UK proposal cited in the posting immediately above comes into effect, the resulting database with comprehensive information on everyone would be an irresistible target for thieves. That fact does not seem to be dissuading the surveillance-mad British government.

The British government is developing a proposal to centralize the data-retention practices of UK communications firms. Under current law, communications providers are required to retain certain kinds of data about their customers for a year, and to make that data available in response to government subpoenas. Under the new proposal, these records would have to be automatically submitted to a centralized government database. The government believes this will facilitate law enforcement access to the information, although a court order would still be required to access it.

The proposal is being drafted by the British Home Office, which performs many of the same functions as the American Department of Homeland Security. Like DHS, the Home Office has pushed aggressively for expanded surveillance capabilities. The Home Office claims that new legislation is needed to cope with changes in the way Britons communicate. The government points to the increased use of e-mail, instant messaging, and other communications technologies, which it claims are hampering its ability to conduct lawful surveillance. It also argues that the legislation is required to comply with the EU's 2006 data retention directive.

The data retention directive has been criticized by civil liberties groups, and the UK proposal has also received harsh reviews from privacy experts. "The fight against terrorism doesn't require a centralized database," Chris Mayers, chief security architect at Citrix Systems, told the BBC. "Such a database would face threats from both outside and inside. The more people who have access to it the more risks there would be."

When data retention is distributed among several private parties, it has some natural resiliency against security breaches. Any given breach will only expose the information of a subset of UK citizens, and will give only a partial picture of those citizens' activities. In contrast, a comprehensive national database would be a treasure trove of information for criminal activities, serving as a kind of "one stop shopping" for identity fraud.

Shadow Home Secretary David Davis (the opposition party's spokesman on Home Office decisions) pointed to the government's poor track record of securing government databases. Last year, the government lost two computer discs containing government records on 25 million people. And in January the Ministry of Defense admitted it had lost control of a laptop containing unencrypted records on 600,000 prospective military recruits. A centralized government database would only heighten the dangers of such breaches, because a single breach could expose more data belonging to more Britons.

Governments have been pushing for stronger surveillance policies on both sides of the pond, but those efforts have been more successful on the British side. Here in the states, the FBI has long been pushing for mandatory data retention laws with little effect. In contrast, the British government already has mandatory data retention rules and is now pushing to expand and centralize those requirements. The British also have a far more extensive network of closed-circuit TV cameras watching their every move in major cities. But as we noted last week, the evidence that these kinds of "security" measures actually increase public safety is hard to find.

One of the strongest critics of the expansion of surveillance in the UK has been Information Commissioner Richard Thomas. ... Unfortunately, thus far the British government seems to be largely ignoring Thomas's warnings, pressing on with expanded government surveillance of private citizens. It may take a massive breach of the government's new centralized database, or a scandal involving misuse of the data, before policymakers take Thomas's warnings seriously.

ANONYMOUS WEB SURFING WITH TORK

The content of your internet transmissions sent via email, HTML forms over the Web, or chat and instant-messaging programs can be encrypted. But your location will not be disguised under normal internet use. Details about who you are communicating with and what protocols and services you are using can be exposed -- and often this information can be as damning as the content itself.

A program called TorK (evidently an acronym for "The Onion Router KDE") is a Linux program which can be run from a Live CD. It routes the internet network packets between you and your destination through a sufficiently Rube Goldbergesque path that the trail is impossible to follow. However, some commonly used file types and plugins, such as Flash and QuickTime, can reveal your origin even if TorK is being used -- see this note.

Everyone who surfs the Net is eminently trackable. Internet data packets include not only the actual data being sent, but also headers with routing information that is used to guide the packages to their destinations. Even if you use encryption for extra safety, the routing information -- which cannot be encrypted -- can reveal details about what you are doing, who you are talking to, what services you are connecting to, and what data you are accessing. Intermediaries (authorized or not) can also see that data and learn about you. If you want a higher level of anonymity, TorK can do the job. It uses The Onion Router (Tor) network to provide you with a safer way of browsing.

Tor sends your network packets through a network of encrypted virtual tunnels, creating a practically untraceable path back to you. When you want to connect to a specific URL, you first connect to a Tor server, which in turn sends the packets to another Tor machine, and so on, until your traffic eventually reaches its destination by means of a complicated, untrackable route. If you make another connection, you get a new route. Anybody who wanted to trace the packets back to you would have to go through several steps, and without any logging to reveal where your traffic came from, the trail would quickly become impossible to follow.

The first version of Tor was made available under a BSD license in 2004. The current version is 0.1.2, from January 2008, with a preview 0.2 release version on its way.

Who could use Tor?

You can use Tor to protect your network communications from nosy interlopers or help retain your anonymity (given some aid by your ISP, your IP address might be mapped to your home), but Tor can be put to other uses as well. If your Internet service provider blocks sites or services, the Tor network allows you to get at whatever you are looking for in a roundabout way. You can also use it to provide a hidden service or Web site without having to reveal its actual location, providing extra privacy -- though this service or site will be available only to other Tor users. Dissidents can use Tor to access information outside of national firewalls (as in China) and bypass the surveillance of oppressive regimes.

This makes a stronger claim than is made on the Tor FAQ itself. As this note concludes: "Tor is a fine solution to many privacy-related problems, but if your adversary is your government, that is ... a really hard problem, and not one that it claims to solve." Obviously it is better than nothing, and at least imposes nontrivial costs on any would-be monitor.

Reporters, bloggers, human rights activists, and intelligence agents can use it to protect their privacy and safety. Both their current location and the places they connect to remain hidden from others. These are just a few of the many types of people who would benefit from the anonymity provided by the Tor network. You can learn about even more users online.

Tor is not a foolproof solution. Some programs and plugins (such as Flash, Java, QuickTime, RealPlayer, and others) can reveal your IP address, and certain behaviors (such as chatting and using your actual name as an identity, for example) can give you away. No security system is guaranteed to be perfect, so if you have a strong need to remain unknown in your Internet usage, take as many precautions as you can.

What is TorK?

TorK is a special KDE package that helps you with Tor and other related tools. TorK is licensed under the GPL, and its latest version is 0.28 from late 2007.

TorK is a Linux-only package, but you can install it on a Live CD. You can then boot any computer from the CD and have a completely anonymized operating system at your disposal. The "Incognito LiveCD" comes with several internet applications -- such as Firefox, chat, and email programs -- pre-configured to use Tor. The claim is that for most computers everything will automatically configure. You can also copy the CD to a USB drive. (Your PC would have to be able to boot from a USB device to make this worthwhile).

Installing TorK is easy. Anonymityanywhere.com offers packages for several distributions, as well as source code. In order to be able to use TorK, you'll also have to get netstat (included in the net-tools package), GeoIP, and Privoxy. They are needed for TorK but not included within. TorK uses netstat to look for network activity that might breach your anonymity, while GeoIP provides geographic information for IP addresses, and Privoxy mediates between your browser and the Internet, filtering out any outbound personal information you could inadvertently send out. If you also want to be able to send anonymous email, add Mixminion to the list of packages. If you plan to use Firefox, it is a good idea to get the Firefox Torbutton add-on, which allows you to enable or disable the usage of Tor.

The first time you launch TorK, a first-run wizard will help you configure your box. ... Tork's main window shows a Play button. Click it, and you will be connected to the Tor network. After you are up and running, several other formerly disabled buttons will be available. For example, you can choose anonymous browsing (with Firefox, Konqueror, or Opera; you would have to configure other browsers on your own to go through Privoxy), send anonymous email, chat (with Konversation, but remember not to use your own name if you are serious about privacy), run an anonymous Web site or Web service, or start an SSH session. After clicking on the appropriate command button, you will probably get some information. You are also likely to get warnings if anything is set up in an inconvenient, unsafe, or unsecure way.

If you want to be sure that you are browsing anonymously, visit a site like WhatIsMyIP.com or whatsmyip.org. They should report an IP address that differs from what you see if you run ifconfig.

The Tor Network tab on the TorK window shows you your current connections, and all available Tor nodes, represented by a national flag and their names. Click on any node to get statistics, or drag and drop a node to add it to your circuit. You can see all the traffic in the Traffic Log tab. Clicking on Change Identity forces TorK to find a new path through the Tor network. Unfortunately, the Help button is dated, providing information on the 0.1 version from 2001.

Conclusion

If you require safe, anonymous browsing, TorK can help you take advantage of the Tor network. TorK provides a simple interface and configuration, reducing the risks that a wrong setup can create. With just a few clicks, you can use TorK to start working transparently.

UNMARKED CHOPPER PATROLS NEW YORK CITY FROM ABOVE

I am the eye in the sky, looking at you, I can read your mind.

Once a technology is developed it is a lock that it will get used in some way. The situations covered in this article actually sound like ones where one might be glad such surveillance capabilities existed and were put into use. Then one remembers that it can be put to lots of other uses, like tracking and apprehending or immobilizing anyone who is suspected to be "an enemy of the state."

In the end it always comes down to this: Do you value your security more than your freedom?

A dramatic close-up of Lady Liberty's frozen gaze fills one of three flat-screen computer monitors mounted on a console. Hundreds of sightseers below are oblivious to the fact that a helicopter is peering down on them from a mile and a half away. "They don't even know we're here," said crew chief John Diaz, speaking into a headset over the din of the aircraft's engine.

The helicopter's unmarked paint job belies what is inside: an arsenal of sophisticated surveillance and tracking equipment powerful enough to read license plates. Police say the chopper's sweeps of landmarks and other potential targets are invaluable in helping guard against another terrorist attack, providing a see-but-avoid-being-seen advantage against bad guys. "It looks like just another helicopter in the sky," said Assistant Police Chief Charles Kammerdener, who oversees the department's aviation unit.

Police Commissioner Raymond Kelly has said that no other U.S. law enforcement agency "has anything that comes close" to the surveillance chopper, which was designed by engineers at Bell Helicopter and computer technicians based on NYPD specifications. The chopper is named simply "23". ... The NYPD also plans to spend tens of millions of dollars strengthening security in the lower Manhattan business district with a network of closed-circuit television cameras and license-plate readers posted at bridges, tunnels and other entry points.

Police have also deployed hundreds of radiation monitors. Kelly even envisions someday using futuristic "stationary airborne devices" similar to blimps to conduct reconnaissance and guard against chemical, biological and radiological threats.

Civil rights advocates are skeptical about the push for more surveillance, arguing it reflects the NYPD's evolution into ad hoc spy agency. "From a privacy perspective, there's always a concern that 'New York's Finest' are spending millions of dollars to engage in peeping tom activities," said Donna Lieberman, executive director of the New York Civil Liberties Union.

Police insist that law-abiding New Yorkers have nothing to fear. "Obviously, we're not looking into apartments," Diaz said during a recent flight. "We don't invade the privacy of individuals. We only want to observe anything that's going on in public."

The helicopter's powers of observation come from a high-powered robotic camera mounted on a turret projecting from its nose like a periscope. The camera has infrared night-vision capabilities and a satellite navigation system that allows police to automatically zoom in on a location by typing in the address on a computer keyboard. The surveillance system can beam live footage to police command centers or even to wireless hand-held devices. ...

On this flight, the helicopter used the camera to look for signs of trouble at several key transportation sites: the decks of Staten Island ferry terminal, the stanchions of the Verrazzano-Narrows Bridge, the giant air vents feeding the Lincoln Tunnel. All of them passed inspection. Without leaving Manhattan airspace, the chopper also was able to get a crystal-clear picture of jetliners waiting to take off from LaGuardia Airport and to survey Kennedy International Airport's jet fuel lines, which were targeted in a plot uncovered last year.

The chopper has helped track down fleeing suspects, including a recent case of a gunman who had shot his wife in Queens. As officers on the ground worried about how to approach the suspect's car, the camera in the sky hovered overhead, peeked inside the vehicle and found that he had already shot and killed himself.

During Pope Benedict XVI's recent visit, 23 patrolled the skies, at one point receiving a call from officers who had spotted a suspicious man with a camera on a rooftop near the pontiff's residence. Diaz radioed back that it was a false alarm. "There was a modeling shoot going on," he said.

WALL STREET, BANKS, AND AMERICAN FOREIGN POLICY

This remarkable traipse through modern U.S. history by the peerless, late, Murray Rothbard both confirms and puts to rest the musings of the "conspiracy theory" industry.

Yes, the financial elites systematically seek to rob the rest of us. Yes, the Federal Reserve, Council on Foreign Relations and Trilateral Commission are important vehicles for effecting this goal. Yes, they control both U.S. political parties, so it does not matter who wins. But no, there is no need for a secret cabal meeting behind the scenes to decide upon actions and policies and then put them into place -- any more than a nest of ants needs to convene about what to do about that piece of breadcrust one of them found. No secrecy is involved. They do everything out in the open, and dare you to try and stop them. It is just a matter of people looking at what is right in front of their eyes. In the words of sage Yogi Berra: "Sometimes you can observe a lot just by watching."

Businessmen or manufacturers can either be genuine free enterprisers or statists; they can either make their way on the free market or seek special government favors and privileges. They choose according to their individual preferences and values. But bankers are inherently inclined toward statism.

Commercial bankers, engaged as they are in unsound fractional reserve credit, are, in the free market, always teetering on the edge of bankruptcy. Hence they are always reaching for government aid and bailout.

Investment bankers do much of their business underwriting government bonds, in the United States and abroad. Therefore, they have a vested interest in promoting deficits and in forcing taxpayers to redeem government debt. Both sets of bankers, then, tend to be tied in with government policy, and try to influence and control government actions in domestic and foreign affairs.

In the early years of the 19th century, the organized capital market in the United States was largely confined to government bonds (then called "stocks"), along with canal companies and banks themselves. Whatever investment banking existed was therefore concentrated in government debt. From the Civil War until the 1890s, there were virtually no manufacturing corporations; manufacturing and other businesses were partnerships and had not yet reached the size where they needed to adopt the corporate form. The only exception was railroads, the biggest industry in the U.S. The first investment banks, therefore, were concentrated in railroad securities and government bonds.

The first major investment-banking house in the United States was a creature of government privilege. Jay Cooke, an Ohio-born business promoter living in Philadelphia, and his brother Henry, editor of the leading Republican newspaper in Ohio, were close friends of Ohio U.S. Senator Salmon P. Chase. When the new Lincoln Administration took over in 1861, the Cookes lobbied hard to secure Chase the appointment of Secretary of the Treasury. That lobbying, plus the then enormous sum of $100,000 that Jay Cooke poured into Chase's political coffers, induced Chase to return the favor by granting Cooke, newly set up as an investment banker, an enormously lucrative monopoly in underwriting the entire federal debt.

Cooke and Chase then managed to use the virtual Republican monopoly in Congress during the war to transform the American commercial banking system from a relatively free market to a National Banking System centralized by the federal government under Wall Street control. A crucial aspect of that system was that national banks could only expand credit in proportion to the federal bonds they owned -- bonds which they were forced to buy from Jay Cooke.

Jay Cooke & Co. proved enormously influential in the post-war Republican administrations, which continued their monopoly in under-writing government bonds. The House of Cooke met its well-deserved fate by going bankrupt in the Panic of 1874, a failure helped along by its great rival, the then Philadelphia-based Drexel, Morgan & Co.

The main body of the article now follows, delving into the machinations of the Morgans, Rockefellers, and lesser financial powers; their roles in making sure the right men were in place to get the U.S. involved in the empire building business, from the Spanish-American War and the creation of the Federal Reserve, through the two world wars and the Cold War, up through 1984 when the article was written.

One interesting element to the story is that classical liberal icon, alleged "Jeffersonian Democrat" president Grover Cleveland comes out looking a little worse when put under the Rothbard microscope. He may have been against sending the troops abroad, which is certainly laudable, but he did not shrink from exercising whatever financial and diplomatic muscle -- with the threat of force in the background -- was needed to make sure his financial benefactors and friends came out on top.

The afterword from Antiwar.com's Justin Raimondo effectively sums up the content of the article, while giving an introduction to Rothbard's theory of class conflict.

Murray Rothbard's 1984 analysis of modern American history as a great power struggle between economic elites, between the House of Morgan and the Rockefeller interests, culminates in the following conclusion: "the financial power elite can sleep well at night regardless of who wins in 1984." By the time you get there, the conclusion seems understated indeed, for what we have here is a sweeping and compressed history of 20th century politics from a power elite point of view. It represents a small and highly specialized sample of Rothbard's vast historical knowledge coming together with a lifetime devoted to methodological individualism in the social sciences. It appeared first in 1984, in the thick of the Reagan years, in a small financial publication called World Market Perspective. It was printed for a larger audience by the Center for Libertarian Studies in 1995, and appears in 2005 online for the first time.

Theoreticians Left and Right are constantly referring to abstract "forces" when they examine and attempt to explain historical patterns. Applying the principle of methodological individualism -- which attributes all human action to individual actors -- and the economic principles of the Austrian School, Rothbard formulated a trenchant overview of the American elite and the history of the modern era.

Rothbard's analysis flows, first, from the basic principles of Austrian economics, particularly the Misesian analysis of banking and the origin of the business cycle. This issue is also discussed and elaborated on in one of his last books, The Case Against the Fed (Mises Institute, 1995). Here, the author relates the history of how the Federal Reserve System came to be foisted on the unsuspecting American people by a high-powered alliance of banking interests. Rothbard's economic analysis is clear, concise, and wide-ranging, covering the nature of money, the genesis of government paper money, the inherent instability (and essential fraudulence) of fractional reserve banking, and the true causes of the business cycle.

As Rothbard explains in his economic writings, the key is in understanding that money is a commodity, like any other, and thus subject to the laws of the market. A government-granted monopoly in this, the very lifeblood of the economic system, is a recipe for inflation, a debased currency -- and the creation of a permanent plutocracy whose power is virtually unlimited.

In the present essay, as in The Case Against the Fed, it is in the section on the history of the movement to establish the Federal Reserve System that the Rothbardian power elite analysis comes into full and fascinating play. What is striking about this piece is the plethora of details. Rothbard's argument is so jam-packed with facts detailing the social, economic, and familial connections of the burgeoning Money Power, that we need to step back and look at it in the light of Rothbardian theory, specifically Rothbard's theory of class analysis.

Rothbard eagerly reclaimed the concept of class analysis from the Marxists, who expropriated it from the French theorists of laissez-faire. Marx authored a plagiarized, distorted, and vulgarized version of the theory based on the Ricardian labor theory of value. Given this premise, he came up with a class analysis pitting workers against owners.

One of Rothbard's many great contributions to the cause of liberty was to restore the original theory, which pitted the people against the State. In the Rothbardian theory of class struggle, the government, including its clients and enforcers, exploits and enslaves the productive classes through taxation, regulation, and perpetual war. Government is an incubus, a parasite, incapable of producing anything in its own right, and instead feeds off the vital energies and productive ability of the producers.

This is the first step of a fully-developed libertarian class analysis. Unfortunately, this is where the thought processes of all too many alleged libertarians come to a grinding halt. It is enough, for them, to know the State is the Enemy, as if it were an irreducible primary.

As William Pitt put it in 1770, "There is something behind the throne greater than the king himself." Blind to the real forces at work on account of their methodological error, Left-libertarians are content to live in a world of science fiction and utopian schemes, in which they are no threat to the powers that be, and are thus tolerated and at times even encouraged.

The Left-libertarian failure to take the analytical process one step further is, in many cases, a failure of nerve. For it is clear, given libertarian theory and the economic insights of the Austrian School, where the next step leads. No empirical evidence is necessary, at this point (although that will come later, and in spades); the truth can be deduced from pure theory, specifically the Austrian theory of the nature of money and banking, and the Misesian analysis of the origin of the business cycle.

This deduction was brilliantly and colorfully made in the first issue of The Journal of Libertarian Studies (Winter 1977), by two students of Rothbard, Walter E. Grinder and John Hagel III, in "Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure."

While a pure free market would necessarily prevent the development of a banking monopoly, "however, the market system does concentrate entrepreneurial activity and decision-making within the capital market because of the considerable benefits which are rendered by a certain degree of specialization."

This "specialized capital market, by the very nature of its integrative role within the market system, will emerge as a strategic locus of ultimate decision-making." Given that some individuals will choose the political means over the economic, some of these great fortunes will utilize their tremendous resources to cartelize the market and insulate themselves against risk. The temptation for bankers in particular to wield the power of the State to their benefit is very great because it permits banks to inflate their asset base systematically. The creation of assets made possible by these measures to a great extent frees the banking institutions from the constraints imposed by the passive form of ultimate decision-making exercised by their depositors. It thereby considerably strengthens the ultimate decision-making authority held by banks vis-a-vis their depositors. The inflationary trends resulting from the creation of assets tend to increase the ratio of external financing to internal financing in large corporations and, as a consequence, the ultimate decision-making power of banking institutions increase over the activities of industrial corporations.

The Austrian insight focuses on the key role played by the central banks in generating the distortion of market signals that leads to periodic booms and busts, the dreaded business cycle which is always blamed on the inherent contradictions of unfettered capitalism.

But in fact this capitalism is anything but unfettered. (Try starting your own private bank.) The last thing American bankers want is an unfettered banking system. Rothbard not only traces the original market distortion that gives rise to the business cycle, but also identifies the source (and chief beneficiaries) of this distortion. It was Mises who pointed out that government intervention in the economy invariably leads to yet more intervention in order to "fix" the havoc wreaked -- and there is a certain logic in the fact that it was the original culprits who decided to "fix" the distortions and disruptions caused by their policies with further assaults on the market mechanism. As Grinder and Hagel put it:

In the U.S., this intervention initially involved sporadic measures, both at the federal and state level, which generated inflationary distortion in the monetary supply and cyclical disruptions of economic activity. The disruptions which accompanied the business cycle were a major factor in the transformation of the dominant ideology in the U.S. from a general adherence to laissez-faire doctrines to an ideology of political capitalism which viewed the state as a necessary instrument for the rationalization and stabilization of an inherently unstable economic order.

Capitalists as Enemies of Capitalism

This explains the strange historical fact, recounted at length and in detail by Rothbard, that the biggest capitalists have been the deadliest enemies of true capitalism. For virtually all of the alleged social "reforms" of the past 50 years were pushed not only by "idealistic" Leftists, but by the very corporate combines caricatured as the top-hatted, pot-bellied "economic royalists" of Wall Street.

The neoconservative Right depicts the battle against Big Government as a two-sided Manichean struggle between the forces of light (that is, of capitalism) and the remnants of largely discredited Leftist elites. But Rothbard's historical analysis reveals a much richer, more complex pattern: instead of being two-sided, the struggle for liberty pits at least three sides, each against the other. For the capitalists, as John T. Flynn, Albert Jay Nock, and Frank Chodorov all pointed out, were never for capitalism. As Nock put it:

It is one of the few amusing things in our rather stodgy world that those who today are behaving most tremendously about collectivism and the Red menace are the very ones who have cajoled, bribed, flattered and bedeviled the State into taking each and every one of the successive steps that lead straight to collectivism. ["Impostor Terms," Atlantic Monthly, February 1936.]

The New Deal economic policy was, as Rothbard demonstrated, prefigured by Herbert Hoover, champion of big business, and foreshadowed in the reforms of the Progressive era. As the revisionist economic historians, such as Gabriel Kolko, have shown, those who regulated the great industries in the name of progressive "reform" were recruited from the very cartels and trusts they were created to tame.

And of course the monopolists did not mind being tamed, so long as their competitors were tamed (if not eliminated). Every giant leap forward of economic planning and centralization -- central banking, the welfare state, "civil rights," and affirmative action -- was supported if not initiated by the biggest and most politically powerful business interests in the country. The House of Morgan, the Rockefellers, and the Kuhn-Loebs must take their place alongside the First, Second, and Third Internationals as the historic enemies of liberty.

Giant multinational corporations, and their economic satellites, in alliance with governments and the big banks, are in the process of extending their influence on a global scale: they dream of a world central bank, global planning, and an international welfare state, with American troops policing the world to guarantee their profit margins.

After the long battle to create a central bank in the U.S., the high priests of high finance finally seized and consolidated control of domestic economic policy. It only remained for them to extend their dominance internationally, and for this purpose they created the Council on Foreign Relations, and, later, the Trilateral Commission.

These two groups have been seized upon by the new populist Right as the virtual embodiments of the Power Elite, and rightly so. It is only by reading Rothbard, however, that this insight is placed in its proper historical perspective. For the fact of the matter is that, as Rothbard shows, the CFR/ Trilateralist network is merely the latest incarnation of a trend deeply rooted in modern American history. Long before the founding of the CFR or the Trilateral Commission, there was a power elite in this country; that elite will likely endure long after those organizations are gone or transmuted into something else. Rothbard's unmasking of the historical and economic roots of this trend is vital in understanding that this is not a "conspiracy" centered in the CFR and the Trilateralist groups, as such, but an ideological trend traditionally centered in the Northeast, among the upper classes, and deeply rooted in American history.

I put the word "conspiracy" in quotes because it has become the favorite swearword of the Respectable Right and the "extremist"-baiting Left. If it is conspiracy-mongering to believe that human beings engage in purposeful activity to achieve their economic, political, and personal goals, then rational men and women must necessarily plead guilty. The alternative is to assert that human action is purposeless, random, and inexplicable. History, in this view, is a series of discontinuous accidents.

Yet it would be inaccurate to call the Rothbardian world view a "conspiracy theory." To say that the House of Morgan was engaged in a "conspiracy" to drag the U.S. into World War I, when indeed it openly used every stratagem, every lever both economic and political, to push us into "the war to end all wars," seems woefully inadequate. This was not some secret cabal meeting in a soundproof corporate boardroom, but a "conspiracy" of ideas openly and vociferously expressed. (On this point, please note and underscore Rothbard's analysis of the founding of The New Republic as the literary flagship of "the growing alliance for war and statism" between the Morgan interests and liberal intellectuals – and isn't it funny how some things never change?)

A conspiracy theory attributes virtually all social problems to a single monolithic agency. Radical feminism, which attributes all the evil in the world to the existence of men, is a classic conspiracy theory; the paranoid views of the ex-Communists in the conservative movement, who were obsessed with destroying their ex-comrades, was another.

But the complexity and subtlety of the Rothbardian analysis, backed up by the sheer mass of rich historical detail, sets Rothbard on an altogether different and higher plane. Here there is no single agency, no omnipotent central committee that issues directives, but a multiplicity of interest groups and factions whose goals are generally congruent.

In this milieu, there are familial, social, and economic connections, as well as ideological complicity, and none is better than Rothbard at ferreting out and unraveling these biographical details. Taken together, the author's small and studied brushstrokes paint a portrait of a ruling class whose ruthlessness is surpassed only by its brazen disloyalty to the nation.

It is a portrait that remains unchanged, in its essentials, to this day. Wall Street, Banks, and American Foreign Policy was written and published in 1984, during the Reagan years.

Reagan started out by denouncing the power elite and specifically the CFR and the Trilateralists, but wound up with that epitome of the Establishment, Skull-and-Bonesman George Bush as his vice president and successor.

Bush is a longtime CFR director, and Trilateralist. Most of his major cabinet officers, including his chairman of the joint chiefs, Colin Powell, were CFR members. The Clinton administration is similarly afflicted, from the President (CFR/Trilateral) on down through Donna Shalala (CFRJ Trilateral) and George Stephanopoulos (CFR), with the CFR honeycombed (as usual) throughout the State Department. In addition to Secretary of State Warren Christopher, other CFR members in the Clinton cabinet include Laura Tyson, chairman of the Council of Economic advisors, Treasury Secretary Robert Rubin; Interior Secretary Bruce Babbitt, HUD honcho Henry Cisneros; and Alice Rivlin, OMB director.

The other side of the aisle is equally co-opted at the leadership level, as vividly dramatized by Gingrich's retreat before the power and majesty of Henry Kissinger. One naturally expects cowardice from politicians, but the indictment also includes what passes for the intellectual leaders of the Republican free-market "revolution."

There is a certain mentality that, no matter how convincing the evidence, would never even consider the argument put forward in Wall Street, Banks, and American Foreign Policy. This attitude stems from a particular kind of cowardice. It is a fear, first of all, of not being listened to, a dread of consigning oneself to the role of Cassandra, the ancient Greek prophetess who was granted the power of foresight by the gods, with but a single limitation: that none would ever heed her warnings. It is far easier, and so much more lucrative, to play the role of court historian.

This is a role the author of this scintillating pamphlet never could have played, even if he had tried. For the truth (or, at least, the search for it) is so much more interesting than the official histories and the conventional wisdom of the moment. The sheer pleasure Rothbard took in unearthing the truth, in carrying out his vocation as a true scholar, is evident not only on every page of the present work but throughout his 28 books and thousands of articles and speeches.

Rothbard was not afraid of sharing Cassandra's fate because, in the first place, truth is a value in its own right, and ought to be upheld for its own sake. Second, the truth has a way of eventually getting out, in spite of the most strenuous efforts to suppress it.

NONE DARE CALL IT REASON

A review of Ron Paul’s new book courtesy of Switzerland.

Ron Paul's new manifesto, The Revolution, has been well-covered in these pages and elsewhere. This piece is notable for coming out of Switzerland. As the writer concludes: "Anybody who wishes to discover alternatives to the present course and that limited constitutional government is not a relic of the past but the only viable alternative for a free people to live in peace and prosperity will find this book an excellent introduction to the libertarian/constitutionalist perspective."

Ron Paul's campaign for the 2008 Republican presidential nomination has probably done more to expose voters in the United States to the message of limited, constitutional governance, individual liberty, non-interventionist foreign policy, and sound money than any political initiative in decades. Although largely ignored by the collectivist legacy media, the stunning fund-raising success of the campaign, even if not translated into corresponding success at the polls, is evidence that this essentially libertarian message (indeed, Dr. Paul ran for president in 1988 as the standard bearer of the Libertarian Party) resonates with a substantial part of the American electorate, even among the "millennial generation", which conventional wisdom believes thoroughly indoctrinated with collectivist dogma and poised to vote away the last vestiges of individual freedom in the United States. In the concluding chapter, the candidate observes:

The fact is, liberty is not given a fair chance in our society, neither in the media, nor in politics, nor (especially) in education. I have spoken to many young people during my career, some of whom had never heard my ideas before. But as soon as I explained the philosophy of liberty and told them a little American history in light of that philosophy, their eyes lit up. Here was something they'd never heard before, but something that was compelling and moving, and which appealed to their sense of idealism. Liberty had simply never been presented to them as a choice. (p. 158)

This slender (173 page) book presents that choice as persuasively and elegantly as anything I have read. Further, the case for liberty is anchored in the tradition of American history and the classic conservatism which characterized the Republican party for the first half of the 20th century. The author repeatedly demonstrates just how recent much of the explosive growth in government has been, and observes that people seemed to get along just fine, and the economy prospered, without the crushing burden of intrusive regulation and taxation. One of the most striking examples is the discussion of abolishing the personal income tax. "Impossible", as other politicians would immediately shout? Well, the personal income tax accounts for about 40% of federal revenue, so eliminating it would require reducing the federal budget by the same 40%. How far back would you have to go in history to discover an epoch where the federal budget was 40% below that of 2007? Why, you would have to go all the way back to 1997! (p. 80)

The big government politicians who dominate both major political parties in the U.S. dismiss the common-sense policies advocated by Ron Paul in this book by saying "you can't turn back the clock". But as Chesterton observed, why not? You can turn back a clock, and you can replace disastrous policies which are bankrupting a society and destroying personal liberty with time-tested policies which have delivered prosperity and freedom for centuries wherever adopted. Paul argues that the debt-funded imperial nanny state is doomed in any case by simple economic considerations. The only question is whether it is deliberately and systematically dismantled by the kinds of incremental steps he advocates here, or eventually collapses Soviet-style due to bankruptcy and/or hyperinflation. Should the U.S., as many expect, lurch dramatically in the collectivist direction in the coming years, it will only accelerate the inevitable debacle.

Anybody who wishes to discover alternatives to the present course and that limited constitutional government is not a relic of the past but the only viable alternative for a free people to live in peace and prosperity will find this book an excellent introduction to the libertarian/constitutionalist perspective. A five page reading list cites both classics of libertarian thought and analyses of historical and contemporary events from a libertarian viewpoint.

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