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CAPITAL FLOW MUST CHANGE COURSE
Why is so much capital flowing uphill, from the poor countries to the rich ones, instead of from the rich to the poor? The question is of great practical importance. The answer should suggest both how long the present pattern of global capital flows or current account “imbalances” is likely to last and how it may end. What, then, is happening to capital flows to and from the emerging market economies? What drives these trends? What role does policy play? Do the trends matter? How should these trends be dealt with?
To start with the trends themselves, figures from the IMF’s latest World Economic Outlook show the scale of the flows. The foreign currency reserves of emerging markets rose by $1,556 billion in 1997-2004, of which $519 billion came last year and another $523 billion is forecast for this year. Those countries ran an aggregate current account surplus of $336 billion last year. It is a dramatically different picture from that in 1996, when emerging market economies ran an aggregate deficit of $93 billion (see chart). Last year’s current account surplus was equivalent to 3.5% of their aggregate GDP, at market prices. Strikingly, that is close to Japan’s ratio.
In addition, those countries received $186 billion in net foreign direct investment last year and a total net private inflow of $196 billion. The sum of the current account surplus and net private capital inflows was equal to 5.4% of their aggregate GDP. Asian emerging economies ran a current account surplus of $193 billion last year, which accounted for more than half the total. The Middle East represented another third of the current account surplus of emerging market countries and the Commonwealth of Independent States (principally Russia) close to a further fifth. The one region of the developing world to run a large current account deficit – of $51 billion – was central and eastern Europe. It was also the only one of these regions to have shifted further into deficit since 1996, by $33 billion.
Three broad patterns emerge. First, the $430 billion swing in the emerging market economies’ aggregate current account deficit was the principal counterpart to the $549 billion increase in the U.S. deficit between 1996 and 2004. Second, two big forces have driven the swing from deficit into surplus are the rise in the price of oil, which has pushed the Middle East and the CIS into large surpluses, and the financial crises of 1996-99, which drove the emerging market economies of Asia and the western hemisphere out of their deficits. Third, the most important emerging market region for the global capital flows is Asia. In addition to running a large aggregate current account surplus, emerging Asia is also remarkable for its massive recycling of private capital inflows.
The principal determinant of the pattern of capital flows is, it turns out, divergent savings rates. In short, because investment rates were closer together than savings rates, the world’s capital exporters were countries with high savings rates and the importers were ones with low savings rates. Surprisingly perhaps, many of the highest saving economies were poor, while some of the lowest saving countries were rich. The U.S. is far and away the most important of the latter, just as China is the most significant of the former.
Do do these trends matter? The answer depends on whether the explosive increases in current account surpluses in emerging market economies and in the counterpart deficits of the U.S. are themselves important. They are. They generate growing protectionist pressure in the . They force the U.S. into monetary and fiscal policies whose consequence is growing indebtedness, both domestically and externally. They are likely to end up in a brutal correction, and that correction is likely to be more brutal the longer it is delayed.Link here.
DUMPING OF U.S. DOLLAR COULD TRIGGER “ECONOMIC SEPTEMBER 11”
THE nightmare scenario that haunts global strategist Clyde Prestowitz is an economic September 11 – a worldwide financial panic triggered by a sudden massive sell-off of U.S. dollars that would lead inexorably to the collapse of economies around the world. If that happens, Prestowitz predicts, “It would make the Great Depression of the 1930s look like a walk in the park.” Australia would be sucked into the vortex of such a recession, which would cause great hardship throughout the world, he warns.
Prestowitz is not a doomsayer, neither is he alone in his views. As president of the Economic Strategy Institute, a Washington think tank, he is in regular contact with the most influential U.S. business leaders, several of whom – Warren Buffet and George Soros included – have taken steps to hedge their currency positions against the possibility of a cataclysmic plunge in the greenback.
“Right now,” he says, “we have a situation in which the U.S. is running huge trade deficits – about $US650 billion ($766 billion) in 2004 – which are financed by borrowings from the central banks of Asia – mainly the Chinese and the Japanese. All the world’s central banks are chock-full of U.S. dollars – they’re holding many more dollars than they really want. They’re holding those dollars because at the moment there’s no great alternative and also because the global economy depends on U.S. consumption. If they dump the dollar and the dollar collapses, then the whole global economy is in trouble.”
Prestowitz, formerly a trade adviser and negotiator for former U.S. president Ronald Reagan, believes the U.S. will continue to be the world’s most powerful economy for the foreseeable future. But he foreshadows an inexorable decline, a trend that is likely to continue “depending on the way we play our cards. … Right now, we’re playing them just about as badly as it’s possible to play them, and that has geo-political implications.” he says. “We’ve outsourced trying to deal with North Korea to China, we really can’t deal with Iran, so we’ve outsourced that to the EU, which is struggling, and Iran is cozying up to China. Other bad actors like Zimbabwe’s Robert Mugabe and Sudan are cozying up to China.
“America’s global hegemony is already under challenge, and that challenge is going to become more and more evident as the extent of the relative U.S. economic decline becomes evident. Right now, the U.S. dollar is probably 40 per cent overvalued versus the Japanese yen or the Chinese renminbi. How’s the U.S. going to look as a global power when the dollar is at 50 per cent of its current value?”Link here.
BAHAMIANS WANT ANSWERS FROM PM
Many Bahamians are anxious to hear from Prime Minister Perry Christie on a number of issues of concern, including the much discussed Petrocaribe oil deal, the liquefied natural gas proposals, the decision to remove Sir Stafford Sands from the $10 bill, and the government’s progress in establishing a national health insurance scheme. But his illness, which struck back in May, coupled with the traditionally slow summer period means that the Prime Minister has been off the front pages for weeks. In January 2004, Mr. Christie started what he promised would be a quarterly “meet the press” event where reporters could pose questions to him on a variety of issues. But it was an initiative that was short lived. In fact, nearly six quarters have passed without the event taking place again. Mr. Christie also has made no national addresses for the year.Link here.
CROATIA’S BEAUTY SHINES THROUGH
Ten years after the end of a bloody civil war, tourists are flocking back to the Dalmatian Coast and its gems – Dubrovnik, Split, and Hvar.
“The best time to walk the wall is just before the sun sets,” our tour guide had told us earlier. And so, as the town is bathed in a vivid golden glow, we find ourselves atop the massive, 2-kilometer-long stone wall that surrounds the Old City of Dubrovnik. On one side, laundry flutters outside shuttered apartment windows, kittens nap on rose-coloured tile roofs, and, some 20 meters below us, white marble alleyways display a treasure trove of Gothic and Renaissance churches, monasteries, Venetian palaces and ornately carved fountains, all crammed together with hole-in-the-wall boutiques and outdoor cafes. On the other side of the wall, laughing youths dive off the rocks at the wall’s base into the cobalt-blue sea. Beyond, yachts and sailboats bobbing in a marina point the way to a picture-perfect beach.
“Those who seek paradise on Earth should come to Dubrovnik,” playwright George Bernard Shaw raved when visiting the city in 1929. To that, I would add, “Come to Croatia”. Dubrovnik may be the country’s medieval showplace city. But the whole southern Dalmatian Coast of Croatia is sprinkled with fascinating medieval walled towns – as well as idyllic offshore islands and parks. Now, 10 years after the end of a bloody civil war that devastated much of Croatia, the country has recently been rediscovered as an off-the-radar haven by the international celebrity set and their media-camp followers.
In May, Croatia, a scythe-shaped country that sits astride the star-crossed, blood-drenched Balkans, was named the world’s hottest travel destination in the new edition of the Lonely Planet Guide to Croatia, which cited its “rich diversity of attractions,” accessibility and “relative affordability” (its currency, the kuna, is far friendlier to the dollar than the euro is) as well as its “stunning beaches and islands” and “magnificent food”. The easiest and most comfortable way to visit is by small cruise ship (indeed, most ports of call are so small, they cannot accommodate the large cruise ships). The calm protected waters off the Croatian coast also make for ideal cruising grounds.Link here.
Croatia – the Insiders Choice for Residence and Yachting in Europe
Croatia is a relatively small country, but it has a spectacular 6,000 km coastline on the Adriatic Sea with more than 1,100 islands, of which only 66 are inhabited. This coast is considered to be the most beautiful in Europe with innumerable bays, inlets, coves and beaches. There are also many historic places such as Pula, Split, Korcula, Hvar, Trogir, Dubrovnik. On the Adriatic coast alone there are four historic places which are listed as World Heritage sites by UNESCO.
Most islands receive more than 2,600 hours of sun a year. Croatia is divided between the Latin-influenced coast and an interior which is more Central European. The official language is Croatian, although English is spoken widely, particularly in larger cities. The capital is Zagreb with about 800,000 inhabitants. Croatia is generally a high-tax country. In 1997, the World Bank ranked it third in the world in its overall tax burden. However, Croatian tax laws offer unique advantages for persons who receive certain foreign income or a foreign pension. Croatia also offers important tax advantages to yacht owners. As these advantages are not well known, Croatia offers the interesting possibility of establishing tax-free residence in a high-tax country.Link here.
CZECH PRESIDENT WARNS AGAINST “SUBSTITUTE IDEOLOGIES OF SOCIALISM”
The most impressive speech during the recent Regional Meeting of the Mont Pelerin Society was undoubtedly Czech President Václav Klaus’s “View from a Post-Communist Country in a Predominantly Post-Democratic Europe”. Klaus has been an MPS member since 1990 and likes to attend the MPS meetings. Though his political obligations (as Prime Minister from 1992 to 1997 and President since 2002) do not always allow him to attend, he combined his presence at the MPS meeting in Reykjavik with an official visit to the Republic of Iceland.
President Klaus warned of the new “substitute ideologies of socialism” such as “Europeanism” and “NGOism”. These “isms” are currently threatening Europe. “In the first decade of the 21st century we should not concentrate exclusively on socialism,” he said. “There is a well-known saying that we should not fight the old, already non-existent battles. I find this point worth stressing even if I do not want to say that socialism is definitely over. There are, I believe, at least two arguments, which justify looking at other ideologies as well. The first is the difference between the hard and soft version of socialism and the second is the emergence of new ‘isms’ based on similar illiberal or antiliberal views.”
Though communism, the “hard version of socialism” is probably over this has not automatically led “to a system we would like to have and live in,” he said. “Fifteen years after the collapse of communism. I am afraid more than at the beginning of its softer (or weaker) version, of social-democratism, which has become – under different names, e.g. the welfare state or the soziale Marktwirtschaft – the dominant model of the economic and social system of current Western civilization. It is based on big and patronizing government, on extensive regulating of human behavior, and on large-scale income redistribution.”
He urged the MPS members and all freedom loving Europeans “to understand this contemporary version of world-wide socialism, because our old concepts may omit some of the crucial features of what is around us just now. We may even find out that the continuous use of the term socialism can be misleading.” … “Illiberal ideas are becoming to be formulated, spread and preached under the name of ideologies or “isms”, which have – at least formally and nominally – nothing in common with the old-style, explicit socialism. These ideas are, however, in many respects similar to it. There is always a limiting (or constraining) of human freedom, there is always ambitious social engineering, there is always an immodest ‘enforcement of a good’ by those who are anointed (T. Sowell) on others against their will, there is always the crowding out of standard democratic methods by alternative political procedures, and there is always the feeling of superiority of intellectuals and of their ambitions.”Link here.
MORE DUTCH PEOPLE HAVE A SECOND PASSPORT
Almost one in every 15 Dutch people in the Netherlands have a second passport, according to a report by the national statistics agency CBS. At the start of 2005, some 977,000 people had both a Dutch and another passport, up 39,000 on the year before. The CBS said that 252,000 Turkish people in the Netherlands have both a Dutch and a Turkish passport. Moroccans are the second biggest dual nationality group in the Netherlands, with some 215,000 holding Dutch and Moroccan nationality. A quarter of the people with dual nationality come from another EU member state, while 14,000 people from Suriname, 12,500 US citizens and an equal number of Egyptians also have a Dutch passport. Immigration and Integration Minister Rita Verdonk has made it clear she wants to see a reduction in the number of dual nationality residents in the Netherlands.Link here.
HONG KONG CHIEF EXECUTIVE INVITES ENTIRE LEGISLATURE TO VISIT MAINLAND WITH HIM
The chief executive of Hong Kong invited the territory’s entire legislature to travel with him to southern China next month, in what would be the largest visit of pro-democracy politicians from here that the Communist leadership in Beijing has ever allowed. A few small groups of democracy advocates did visit Beijing from Hong Kong during a period of greater political openness on the mainland in the late 1980’s. But with very few exceptions, China has banned Hong Kong’s pro-democracy politicians from crossing the border ever since June 4, 1989, when many of them outspokenly denounced the Chinese Communist Party for the Tiananmen Square killings. The decision to let democracy advocates into China again comes after years of quiet American pressure, and eight days before President Hu Jintao is scheduled to meet President Bush in Washington.
Martin Lee, the founding chairman of the Democratic Party and a member of the legislature periodically excoriated by China’s official media, said he would accept the invitation and visit China again for the first time since early 1989. “I’ve got two dreams,” he said. “One is to return to the motherland and the other is to see democracy in Hong Kong.” Lee Wing-tat, the current chairman of the Democratic Party and another lawmaker banned from the mainland since 1989, said he would also accept the invitation and would urge other pro-democracy lawmakers to do the same.
Democracy advocates have not made any secret deals to support Donald Tsang, the new Hong Kong chief executive, in exchange for being allowed back to the mainland, Martin Lee and Lee Wing-tat said in separate telephone interviews. Sing Ming, a political scientist at the City University of Hong Kong, said the overture from the chief executive, who is in effect appointed by Beijing, might be intended to appeal to public sentiment here, which tilts toward greater democracy. But Mr. Sing said it was unlikely that top Chinese officials would accept a substantive shift toward greater democracy. “I think this gesture represents a limited and yet realistic gesture from Beijing,” Mr. Sing said. “I am still pessimistic that this represents a big step forward.”Link here.
“ALL I DID WAS SAY THEY CAN’T RUN A FAIR ELECTION”
I have got bad news for anyone already made queasy by the marathon length of American presidential elections. Not only is the 2008 race already concentrating political minds, it is becoming ever clearer the country has not recovered from the infamous mano a mano between Al Gore and George W. Bush in Florida in 2000. In fact, in many important – and depressing – ways, the battle over Florida is still raging. I have learned this the hard way, by becoming part of the battle myself. This past week, a posse of internet screamers who clearly do not like the idea of an uppity Brit questioning the legitimacy of George W. Bush’s first election took it upon themselves to denounce me as a “conspiracy journalist”, a “left-wing hack” and a bare-faced liar.
The occasion for their fury was a book I have written chronicling, and attempting to explain, the inability of the world’s most powerful democracy to conduct fair and transparent elections by any recognizable international standard. It came as no surprise that some people would find the premise of the book troubling, even offensive. My conclusions are hardly tender towards voting machine manufacturers, local and state election officials, or indeed the entire two-party system that underpins U.S. politics. What I was not expecting, however, was that the object of the internet screamers’ fury would be the raw arithmetical data from the 2000 presidential race, something I had naively believed had moved on from the stuff of partisan brick-throwing into the realm of historical research and analysis.
The storm broke out when the New York Times columnist Paul Krugman generously cited my book and argued that many Americans are unaware of some deeply troubling facts about their country’s electoral system. He, like me, pointed out what extensive analysis of the Florida ballots after the election had indicated as far back as 2001: that a full statewide recount – an option rejected by both Democrats and Republicans in the heat of the battle even though it was the only democratically responsible thing to do – would have narrowly tipped the balance of the race in Al Gore’s favor.
In the book, I use this point as much to attack the Gore campaign’s deficient commitment to counting all the votes as I do to argue that he deserved to win. But the internet screamers did not appreciate this line of argument, largely because they did not bother to follow it for themselves. Soon, I was subject to wholesale character assassination, by people who did not know a whole lot about me, and seemed in no hurry to find out.
It has become fashionable to say that 11 September 2001 was the day that changed everything in American politics. But I am not sure the bigger watershed did not come nine months earlier when the Supreme Court pulled the plug on the Florida battle and installed Bush in the White House. Given the trauma and upheaval of everything that has happened since it is perhaps natural for Bush supporters to dig in their heels and claim full democratic legitimacy for what the administration has wrought. No wonder the passions continue to rage.
What Florida suggested – and continues to suggest – is that the very foundation of the American democratic system is corrupted and rotten. And that is a reality many Americans may not yet be ready to confront.Link here.
KPMG WORKS ON DEAL TO AVOID INDICTMENT
After a week of intense negotiations, federal prosecutors and KPMG LLP continue to hammer out the terms of a deal that would allow the accounting firm to avert criminal indictment over its tax shelter sales in the 1990s. Prosecutors in the office of the U.S. attorney for the Southern District of New York and lawyers for KPMG are working on procedural issues, according to sources familiar with the talks who spoke on condition of anonymity because the agreement had not yet been finalized.
The sources said the pact under consideration calls for KPMG to pay as much as $500 million in penalties and to submit to outside monitoring, among other terms. If the firm stays out of trouble for a set period of time, prosecutors would agree to drop charges against it. Any deal between prosecutors and the firm would require the approval of a federal judge. At the same time, the government soon could unveil criminal charges against several former KPMG partners and other professionals who worked closely with them on the tax shelters, which were sold to wealthy investors between 1997 and 2001.Link here.
How an accounting firm went from resistance to resignation.
The weather was balmy in Orlando, Florida, when partners of the accounting firm KPMG gathered in November 2003 for their annual meeting, but hundreds were glued to television sets. They were watching C-Span’s coverage of a Senate subcommittee hearing into four questionable tax shelters created and sold by KPMG that earned the firm $124 million in fees, but cost the Treasury, according to Senate investigators, at least $1.4 billion in unpaid taxes. Confronted with KPMG e-mail messages and documents that showed tax executives aggressively pushing the shelters to clients, KPMG executives at the hearing were evasive. One irritated senator asked a KPMG senior executive to “try an honest answer.” A current senior executive said later that for the partners, “it was like watching your own house burn down.”
Three weeks after the hearings, KPMG’s chief executive, Eugene D. O’Kelly, called a meeting of the firm’s 15-member board, and there, according to the senior executive, he announced that KPMG was taking “a new direction.” That new direction paved the way for a settlement with the Justice Department over the creation and sale of the arcane tax shelters, which the I.R.S. contends helped wealthy investors illegally hide billions of dollars in taxable income. The agreement, which is expected to be announced tomorrow, calls for the firm to pay $456 million and accept an outside monitor of its operations. Former partners separately may face criminal charges.
The December 2003 board meeting was the turning point for the firm in its seven-year battle with the government. After years of fiercely resisting questions from the I.R.S. and Justice Department about its tax shelter business, KPMG was going to cooperate with the government’s investigation. KPMG had realized that its defiance was threatening its existence. …Link here.
PRESSURE MOUNTS ON AUSTRALIAN GOVERNMENT TO AXE TAX RATES
Pressure is mounting on the federal government to slash taxes, with Labor pledging to cut the top rate and overhaul the entire system. Labor has vowed to make tax cuts an election promise and backed calls by Liberal backbencher Malcolm Turnbull for cuts to the top tax rate of 47%. Mr. Turnbull has released his own blueprint for tax cuts, which would chop the top rate to between 35 and 40% – putting him in direct conflict with Treasurer Peter Costello. Opposition finance spokesman Lindsay Tanner agreed the top tax rate should be cut and the entire system revamped to help middle and low income earners.
“We don’t have a problem with the idea of cutting the top marginal tax rate provided the overall balance is fair,” he said. “We need fundamental reform of our tax system, we need to simplify it, we need to reduce the rates, we need to reduce the concessions and deductions. That’s our objective, we’re obviously a long way from detail but that’s our starting point.” Under Mr. Turnbull’s plan, the 30% tax rate would also be sliced to 29%, while the lowest 15% rate would be maintained.
However, while his plan is broadly in line with Prime Minister John Howard’s belief the top tax rate is too high, it conflicts with Mr. Costello’s views. A day after handing down the budget in May, Mr Costello said lifting the tax threshold would be fairer than cutting tax rates which substantially benefited those on high incomes. It is not the first time Mr. Turnbull’s views have clashed with senior government members.Link here.
KOREA TO ALTER TAX LAWS
South Korea’s Finance Ministry said Friday it will seek to revise related tax laws to curb so-called “treaty shopping” by foreign investors. Treaty shopping refers to when a resident of a third country takes unfair advantage of the beneficial provisions of a tax treaty between two other countries. According to a draft of revised tax codes, the country’s tax authorities would levy withholding taxes on foreign funds registered in tax havens if their South Korean operations transfer investment gains to them. The revised tax codes also stipulate that even in the case of international transactions, entities that virtually enjoy income are subject to tax treaties and taxation.
The ministry said the new regulations would go into effect next year once parliament approves the revised plans. The ministry’s measure came amid growing criticism that some foreign funds such as U.S.-based Newbridge Capital had earned hefty gains in Asia’s fourth-largest economy through treaty shopping, but avoided paying taxes on their passive incomes. The ministry said it will study ways to levy taxes on the resident of a third country if he or she gains passive income here, but avoids fair taxation by setting up a paper company in a country with which South Korea signed a tax treaty.
Foreign investors have poured a total of $8.9 billion into South Korea through countries offering very favorable tax laws for foreign businesses and individuals, a government report showed. In an effort to help corporate restructuring, the Finance Ministry said it will also seek to revise tax codes under which companies will be given a variety of tax incentives. Smaller companies and the self-employed in particular will get a temporary two-year cut in their value-added tax rate.Link here.
Seoul to tighten duty rules on funds registered in tax havens.
South Korea plans to tighten tax rules so foreign funds registered in tax havens can be charged capital gains duty, the finance ministry said. The move comes after public outrage at how some foreign funds, including US-based Newbridge Capital, have earned huge profits in South Korea without paying duty, taking advantage of a double-taxation treaty.Link here (subscribers only).
FLATTER-Y WILL GET YOU EVERYWHERE
On tax reform, Steve Forbes has the right idea. Congress goes back to work next week, and a week or two after that President Bush’s Advisory Panel on Tax Reform will present its report on “revenue neutral policy options for reforming the Federal Internal Revenue Code.” Chaired by former U.S. senators Connie Mack (R., Florida) and John Breaux (D., Louisiana), the panel was instructed to come up with ways to “(a) simplify federal tax laws to reduce the costs and administrative burdens of compliance … (b) share the burdens and benefits of the Federal tax structure in an appropriately progressive manner … and (c) promote long-run economic growth and job creation.”
The panel will surely conclude that America has an abysmal tax system. It is politically motivated. Members of Congress amend the code to reward their friends and punish their enemies. And as every taxpayer knows, it is maddeningly complex, sometimes incomprehensible, time-consuming to comply with, and frustrating. Steve Forbes’s new book, Flat Tax Revolution defines the problem: 1.) The tax code has been amended 14,000 times and is 60% longer since Ronald Reagan’s presidency, 2.) The cost of compliance in terms of taxpayer time has risen 67% in the past decade and a half, and 3.) Americans spend more than six billion man-hours each year filling out tax forms at a cost to the economy of $200 billion.
So what should the president’s panel recommend? A tax code that will raise at least current revenues and is simpler and easier to comply with, demanding less cost, time and effort by all of us. One option is to replace personal and corporate income taxes, Social Security and Medicare payroll taxes, capital gains and estate and gift taxes with a 30% national sales tax. But before the national sales tax is enacted we would have to repeal the 16th Amendment, which authorized the personal income tax. Otherwise we would quickly have the current income tax burden and a national sales tax. There is a better solution, one advanced almost 10 years ago by the National Commission on Economic Growth and Tax Reform: “a single, low tax rate with a generous personal exemption” – a flat tax.
Such a tax reform plan meets America’s goals: It is simple and understandable, applies to everyone, gets government the revenues it needs, and would end congressional manipulation of the tax system. Most important, America needs stronger economic growth, and the flat tax would help generate it.Link here.
An idea whose time has come – just not here.
The flat tax – the same tax rate for everyone, without all the deductions that now complicate the tax code – is an idea with a decades-long pedigree. Politically its high-water mark in the U.S. came in 1996, when Steve Forbes ran for the Republican presidential nomination against Bob Dole and a tired GOP establishment. Mr. Forbes single-handedly thrust revolutionary ideas into the political headlights – ideas about health insurance and Social Security, for instance, but most famously about the tax code itself. The GOP establishment hated his message, but the conservative rank-and-file loved it. Mr. Forbes was suddenly the talk of the town. There he was, with his signature horn-rimmed glasses and geekish smile, plastered on the cover of Time magazine. And for a brief moment it appeared that he might even win the nomination and topple the Republican establishment.
But then various deep-pocketed interest groups stirred themselves into action. In January 1996, for instance, the housing industry spent millions of dollars on TV and print ads explaining to New Hampshire voters that Mr. Forbes’s flat tax, by eliminating the mortgage-interest tax deduction, would destroy the value of their homes and send their tax bills through the ceiling. Not a word of it was true, but truth is often a casualty in political polemics. Mr. Forbes fell like an oak.
As Mr. Forbes is fond of noting in Flat Tax Revolution, the idea he touted did take hold – just not in the U.S. 10 nations – most from the former Soviet Union, including Russia itself, with its 13% rate – have embraced a flat tax. And the economies of these countries are reaping their reward: They far outpace crusty Old Europe in GDP growth and job creation. China, Germany, and Spain could be the next dominoes to fall.
Mr. Forbes argues that international competition seems to be driving the flat-tax frenzy. “Countries increasingly recognize that if they don’t adopt the flat tax, they will lose jobs, capital and their own ambitious entrepreneurs to more growth friendly nations.” He shows that, in virtually all the countries with a flat tax, government coffers overflow with tax receipts. These real-life examples are obviously sweet vindication for Mr. Forbes, who has often been accused of self-interestedly trying to push down tax rates on wealthy families like his own while depleting the government of the revenues needed to pay the bills. Mr. Forbes takes a machete to such fallacious arguments.
Most of the ideas that Mr. Forbes campaigned on in 1996, ideas that seemed so revolutionary back then – term limits, Social Security privatization, Medical Savings Accounts, capital-gains tax cuts – have since been adopted or are under serious debate. The flat tax is the last major Forbes reform yet to take root. Eventually, it will.Link here.
TAX SHELTER CASES SHED LIGHT ON BANKS’ ROLE
In November 2001, Daniel E. Berce’s private banker offered him a way to avoid $3 million in taxes he owed after cashing in a large block of stock options. Berce had good reason to trust the Dallas-based banker. Bank One had been his personal bank for 18 years. Bank One was also a major financier to AmeriCredit Corp., the huge Fort Worth-based auto lender. At the time, Berce was AmeriCredit’s CFO – and the company’s good fortunes had made him a millionaire. The bank offered Berce a way to not pay taxes on some of those millions. It was called Homer and was a tax-sheltering foreign currency transaction (named after the “Simpsons” character) that all but eliminated Berce’s stock option gains. The problem is that Homer was a sham, according to government sources, lawyers familiar with the case, and lawsuits by Berce and several other wealthy business people.
The Berce case and others, as described in state and federal court filings, highlight the central role U.S. banks have played in the unfolding tax shelter scandals. While accounting and investment firms devised the shelters, banks helped promote and sell them. Accounting firm KPMG LLP agreed to pay $456 million and to cooperate with authorities investigating tax shelter deals. Rival Ernst & Young LLP remains under grand jury investigation for its role in selling shelters.
But experts say about a dozen major financial institutions with divisions that cater to the super-wealthy were in most cases the point of entry for tax shelter promoters, and federal investigators are expanding their probe to the role that bankers, financial advisers and lawyers played. Often, lending institutions such as Wachovia Corp. referred their wealthy clients to promoters selling what the IRS says are invalid shelters. In other cases, experts at such institutions as Bank One and Bank of America devised and sold questionable tax avoidance strategies themselves. The IRS has estimated that tax shelters promoted by those banks and others improperly shielded more than $8 billion in income from federal taxes.
The fees for providing such tax-avoidance strategies were substantial. Berce paid Bank One and the co-promoters of Homer – Jenkens & Gilchrist PC and Deutsche Bank AG, the German bank that made billions of dollars of “loans” to make the deals work – $350,000 in fees. And Berce, now AmeriCredit chief executive, was not the only AmeriCredit insider who bought into Homer. AmeriCredit director James H. Greer, owner of a Houston building products company and also a client of Bank One, paid $600,000 in fees for a Homer in an attempt to avoid $5 million in taxes on AmeriCredit stock options. Both men were told by the IRS in 2004 to amend their tax returns for 2001 and pay interest and penalties, according to their lawsuits against Bank One.Link here.
U.K. TREASURY DENIES “LEANING” ON JERSEY STATES
The Forum of Private Businesses is currently waging a campaign against big companies opening in VAT-free jurisdictions, which, it says, exploits a loophole to avoid paying tax to the UK Treasury. “The forum is turning up the heat in its war against retail giants exploiting the Channel Islands VAT status by taking its campaign to a key meeting with HM Revenue and Customs today,” said Ben Pinnington, of the FPB. “The meeting comes days after we received a tip-off from a source close to Jersey’s government that confirmed HM Treasury exerted enormous pressure on the Jersey government earlier this summer.
“This resulted in the Jersey government’s embarrassing u-turn in announcing that no further UK-based retail giants would be allowed to set up on the island. This came just months after Jersey’s leaders had made the industry a key part of its future economic development.” Jersey recently announced that it planned to restrict the growth of companies that used the island’s favourable VAT status to export goods to the UK without contributing to the economy.Link here.
Watchdog growls as big stores avoid tax offshore.
The government’s spending watchdog is to investigate the way that e-commerce companies, such as offshore gambling sites, lessen their UK tax bills. Retailers including Tesco, Woolworths, and Amazon, who can avoid VAT by selling products to online customers via subsidiaries in Jersey or Guernsey, are also likely to find their methods scrutinised by the National Audit Office (NAO). The NAO is concerned that Revenue & Customs may not be cracking down effectively on potentially abusive avoidance schemes. “E-commerce is changing very fast, and so are the risks it poses. We want to make sure that the tax authorities are making people abide by the rules,” an NAO spokesman said.
The move is likely to highlight the opportunities that some companies have taken to move key operations to tax havens. Although there is nothing illegal about these schemes, many fly in the face of Chancellor Gordon Brown’s declared ambition to reduce tax avoidance, which is thought to cost the public purse tens of billions of pounds annually. The Chancellor has closed numerous tax loopholes in recent years, and has targeted City bonuses and the private equity industry since his last budget. Several online gaming firms make the majority of their money from customers in Europe and America but pay little tax because they base their operations offshore.Link here.
AUSTRALIAN S.E.C. CLAIMS OFFSHORE TRUSTS USED AS VEIL FOR INSIDER TRADING
The Australian corporate regulator is growing more concerned about the proliferation of secret offshore trusts which can be used to conceal sharemarket trading. Berna Collier, commissioner at the Australian S.E.C., said the Offset Alpine affair – where deceased trader Rene Rivkin was found to have held Offset Alpine shares overseas despite his denials to ASIC – shows how disguised offshore accounts may be used to avoid market disclosure laws. And investigations by the Tax Office and Crime Commission into the abuse of tax havens are exposing dozens, if not hundreds, of secret offshore trusts, or “blind” trusts, where the true controllers and beneficiaries are not revealed to authorities or named on trust documents.
“A blind trust may raise questions for us because you must query the motive for why it’s being used,” said Professor Collier. “It’s a big priority for us to ensure that in the operation of a market there’s as much transparency as possible.”Link here.
A HEDGE FUND FALLS OFF THE FACE OF THE EARTH
“Hello, this is Dan Marino,” says a weary, raspy voice on an answering machine. Mr. Marino, the chief financial officer of the Bayou Group, a $400 million hedge-fund and brokerage firm that is under investigation by state and federal authorities in Connecticut, sounds beleaguered. “Please leave me a message,” he goes on. “I am receiving lots of phone calls. I am unable to pick up every call, so if you do call, leave a message and a number. I will get back to you.” Bayou investors are dying to know why their money has not been returned as the firm promised last month. But if they are hoping for a return call, they are out of luck. “Sorry,” says a chipper female voice on the tape. “You cannot leave a message now. This mailbox is full.”
Those few, unsettling words are just about all that investors in the four Bayou funds have to go on right now. Money that was supposed to be wired to their accounts in mid-August after the funds wound down has not appeared. The funds’ principals, its accountants and its lawyer are not talking. The funds’ offices in Stamford stand empty. All that Bayou’s investors can do is wait, fret and wonder what went wrong at the funds, run by Samuel Israel III, a folksy Wall Street veteran who seemed to turn in a steady, if unspectacular, performance.
“What panicked me, when I sat back and thought about it, was I know practically nothing about these people,” said John C. Siegesmund III, an investor in Denver who had never put money in a hedge fund before he sank $250,000 into Bayou in February 2003. “They had good returns, they seemed reputable, there’s nothing sort of fly-by-night about them. But when the chips are down, you don’t know what you’re getting into.” The F.B.I. has joined Connecticut banking officials and federal prosecutors who are trying to plumb the Bayou mess. It is unclear what they will discover, but investors are hoping, of course, that their money will be found and returned. Whether or not it is, the Bayou situation is a cautionary tale for investors rushing to participate in the hedge fund boom of recent years.
Investors who spoke about their involvement in the funds said they were surprised by recent events and that Bayou had none of the earmarks of a Ponzi scheme. For example, while Mr. Israel’s returns were impressive – they almost always beat the returns in the broad stock market indexes by a few percentage points – they were not too good to be true. Bayou also allowed investors to leave the fund at any time – by contrast, many hedge funds have lockup arrangements that keep investors’ money tied up. Unlike most hedge funds, Bayou did not charge a management fee; its management simply took the standard incentive fee of 20% of profits. Investors said they also liked the fact that Mr. Israel was in regular communication. Every week, he sent a detailed e-mail message with updated returns. Bayou’s investment strategy was also understandable: it was composed of stocks and exchange-traded funds. No murky derivatives, risky commodities or currencies. And the only leverage he used was garden variety – buying on margin. Perhaps most appealing, Bayou’s funds had lower minimum investments, at $250,000, than are typical at other hedge funds.
As is true of most hedge funds, Bayou hired outside marketers to bring investors into the fold. According to one investor, its assets under management really ballooned in 2003 and 2004, rising to more than $400 million from $100 million. Problems started emerging, investors said, in late 2004, when Mr. Israel wrote a letter trying to quell rumors about his funds that he said were circulating around Wall Street. Mr. Siegesmund said that he began to become nervous last spring, when he talked with a hedge fund marketer who told him that his firm was telling its clients to exit Bayou Funds. “He said: ‘There’s not enough transparency there. They use their own brokerage, and we can’t figure out how they do their internal accounting,’” the investor recalled.Link here.
Bayou mystery raises hedge fund fears.
The apparent collapse of a $400 million U.S. hedge fund group in a bizarre series of events under investigation by state and federal regulators has left investors nervous and resulted in calls for more regulation of the $1 trillion industry. The Bayou hedge fund, run by Samuel Israel, told investors it would close and return their money in August, but failed to give back any money. Regulators, including the F.B.I., the S.E.C., and the Connecticut attorney-general, are investigating for fraud.
In a story which has all the hallmarks of a great mystery, Mr. Israel and Daniel Marino, the chief financial officer, have not left town but remain sequestered in their Connecticut homes, leaving investors and regulators to mull over several strange communications from them. According to the Wall Street Journal, Mr. Israel taped a note to the door of his house saying that Bayou was still solvent. Mr. Marino left a suicide note in the deserted Bayou office, outlining extensive fraud at the fund. However, he did not kill himself and was subsequently interviewed by police. The Arizona attorney-general’s office said it had in May seized $100 million from a suspicious Wachovia bank account, and this money appeared to belong to Bayou.
Several well-regarded firms invested with Bayou, but there also appear to have been red flags that kept some investors away. Two separate individuals told the Financial Times that last year they steered clients away from Bayou because of concerns about the fund. Both cited “weird” letters sent to investors by Mr. Israel as one reason for avoiding Bayou. They also pointed to a lawsuit against him, and an investigation by the National Association of Securities Dealers.Link here.
Bayou troubles cast shadow on hedge fund consultant.
he apparent collapse of the Bayou Group, the Connecticut hedge fund manager, has attracted scrutiny to the Hennessee Group, one of the oldest consultants in the hedge fund business. Hennessee raised tens of millions of dollars for Bayou, people in the hedge fund business said. The Hennessee Group, based in New York, was set up in 1997 by E. Lee Hennessee, a former broker who had a history dating back to the 1980’s of recommending hedge funds. Her firm’s clients include a mix of wealthy individuals and some pension funds, but she is mostly compensated by the hedge fund managers, an arrangement that some fund managers say is rife with conflict.
The troubles at Bayou have cast a shadow on Ms. Hennessee, who until recently was a steady presence in the financial press and at industry conferences, with her husband and partner, Charles J. Gradante. The firm has developed widely cited indexes that track hedge funds. Many hedge fund investors, particularly wealthy individuals, still tend to pick managers based on reputation and connections. “There’s a whole network of high-net-worth individuals out there who share information,” said Sandra Manzke, a longtime industry consultant. “Everyone looks at the same names.”
At a time when hedge funds are attracting greater scrutiny from regulators, some managers have begun criticizing the way Ms. Hennessee conducts her business. The firm represents itself as working on behalf of investors in hedge funds. According to their Web site, the firm does not “market money managers”. “The investor is our client,” it states. But Ms. Hennessee receives lucrative fees from hedge fund managers for whom she raises money. One hedge fund manager who declined to speak for attribution because of fears of jeopardizing a relationship with Hennessee, has done business with Hennessee and said the firm was typically paid 1% annually of assets it brought in, for as long as those assets remained in the funds. Often, managers pay those fees in the form of brokerage commissions, channeled through a brokerage firm with whom Hennessee has a relationship, the manager said.
This arrangement is highly unusual, and much more lucrative than the way marketers are usually compensated, competitors and fund managers said. Typically, fund marketers charge up to 20% of management fees and 20% of the fund manager’s share of any profits. Some fund managers said that the way Hennessee was compensated was fraught with conflict.Link here.
FLORIDA PONZI SCHEME MASTERMIND SENTENCED
More than four years after Orlando’s Evergreen Security erupted in scandal, one of the masterminds of the biggest consumer fraud in Florida history has been sentenced to prison and ordered to repay almost $125 million. Robert W. Boyd, a former Evergreen Security executive, was sentenced this week to 37 months in federal prison, to be followed by three years’ probation, according to the U.S. Middle District Court in Tampa. He must pay at least $25 a month in restitution while imprisoned and $200 a month after his release. Although technically based in the British Virgin Islands, Evergreen Security operated out of a downtown Orlando office tower for most of the 1990s and involved a number of local financial advisers, brokers and lawyers.
Boyd and his associates ran a classic Ponzi scheme, luring initial investors with guarantees of lucrative returns but using money from later investors to pay dividends, prosecutors said. Such schemes typically collapse once new investments dry up. Investors lost an estimated $214 million from the Evergreen scheme, which had promised high returns from mortgage-backed securities. In reality, the money was placed in risky derivative funds, socked away in offshore accounts or stolen by the firm’s executives.Link here.
THE HISTORICAL DEVELOPMENT AND APPLICATION OF TRUSTS IN THE UNITED STATES
There is a popular saying regarding Trusts which is that “the limit of trusts is the imagination”, given its known flexibility and application in terms of contracts and its success, brought about by the practical experience obtained from its development throughout history. This has led to the conclusion that this instrument, which is becoming more commonplace every day, is clearly useful in any activity, provided that these activities are legal and it is applicable to an infinite series of objectives, whether individual or collective, all for the common good.
One may say that the Trust Contract is extremely peculiar, not only for the characteristics and modality which it displays, but also this affirmation, for the greater part, becomes more meaningful if we examine its origins which date back to ancient Rome up until it passes into Common Law, which will be analyzed later. To give an idea of the general way in which trusts function, we will define the three essential elements at work: the settlor, who is the owner of the goods and rights that form part of the trust; the trustee, who is responsible for administering the equity in the trust; and the beneficiary of the trust. The flexibility of trusts, as previously mentioned, is based on the fact that it covers all types of goods and rights so that any item may become the object of a trust. This explains the importance that this type of contract is gaining, because the real element of the contract, specifically the entrusted goods, are without limits, except those established by the law and by the owner of the goods.
It is interesting to quickly analyze what is mentioned in article 634 of our Commercial Code which refers to the goods that form part of the trust as autonomous equity set aside for the purpose of the trust. This matter of autonomous equity has been criticized and there have been many questions asked with regards to the idea that the equity entrusted can in no way be autonomous because it is a real element of the contract and must necessarily have an owner. Actually, the majority are of the opinion that all the goods and rights that are entrusted to the trustee should be registered. This is what makes it attractive, if we examine it from another perspective. Once the goods are handed over to the trustee, they cease to be the equity of the settlor and can not be pursued by third parties.
“Trust” implies confidence, the reason being that the trustee should play the role of a good father and he is prohibited from profiting from the goods of the “trust”. In Anglo-Saxon Law, there is nothing that prohibits the beneficiary from also being the trustee and vice versa, but there can not be only one beneficiary in the trust who is also the only trustee, for the simple reason that this person would have absolute control of the goods.Link here.
ARE YOU READY FOR THIS DRIVER LICENSE RENEWAL NIGHTMARE?
Not to say we told you so, but we did. Last May, a few days before Congress passed the Real I.D. Act, we warned about the coming confusion. Now state officials are sounding the alarm. The new law, which takes effect in 2008, might better be termed the No Document Left Behind Act. It sets out what paperwork the states must require of people trying to obtain or renew a driver’s license. If this law stands, getting a license will become a frustrating several-day affair. And a darn sight more expensive.
First, as is already the case, applicants will need proof of their date of birth, in most cases a birth certificate. They will also need to prove they live where they say they live. Fine. The new requirements include official proof of applicants’ Social Security numbers, or proof that they do not need Social Security numbers. The law also says everyone will have to produce some sort of photo ID, or some other impressive I.D. with the person’s full name and date of birth. That likely means a passport. And people will need to prove they are U.S. citizens or that they are in the country legally. The law stipulates that no foreign documents can be used for any of these purposes, except a passport.
Once an applicant presents all the papers, the law says the examiner must verify them. That means calling embassies to check on foreign passports. It means checking the places where applicants were born. It means matching Social Security numbers with federal records. It means double-checking U.S. passports and green cards and naturalization certificates. It means chaos. Already, N.H. Emergency Services Director Bruce Cheney is recommending that all residents of New Hampshire get passports and birth certificates right away. If you wait until 2008, the delays could be horrendous, and many people would not be able to drive in the interim.
Oh, and the law says the state must make copies of each document presented in support of a driver’s license application and keep those copies filed away digitally for 10 years. That will put all our personal information in one neat database for identity thieves to find. And, if credit-card companies cannot protect such things, how well do you suppose our state government will do?
Although the law imposes consequences if a state refuses to adopt these procedures – its drivers will not be able to use their licenses as identification when they board airplanes or visit nuclear plants – those would be less onerous than the law itself. Other states have already taken note of this. In Montana, the Legislature has expressed its intention to opt out. The real I.D. Act is an economic outrage and a civil-liberties nightmare. One way or another, the Live Free or Die state should join the rebellion.Link here.
YOU DON’T HAVE TO FIT A RACIAL PROFILE TO RUN AFOUL OF U.S. CUSTOMS OFFICIALS
To some this may be passé. But to white Canadian boys, it is still new. So bear with me. I was at Pearson International recently en route to New York City. I had my passport, aware that soon enough we would no longer be permitted to enter the country without one. I waited in the snaking line of U.S. customs control the requisite 40 minutes. The director of traffic, the man in a blue blazer at the front of the line, sent me to booth number five when it became free. It was manned by a woman no older than 30. I thought this would be to my advantage. I figured it would be better than dealing with a man. Angry men are generally less susceptible to male charm, you see.
Unfortunately, my customs officer was a woman who had been angry many years before she met me. There was no charming her. I was doomed before I started. She did not yell but almost yelled. Where was I going? New York City. My purpose? Vacation. Where was I staying? The Bronx. I was staying with a friend. What is the address? I am sorry? The ADDRESS? She was yelling now. I don’t know it, I stammered. The friend I am staying with is going to pick me up. I had been to America countless times before and had never once been asked for an address. You need an address, she said. I am really sorry, I do not know it. What am I supposed to do? Her arms were crossed.
You are gonna have to find it out. How, I asked? You will have to call your friend. But he works in a hospital. He will not answer his phone. She had not uncrossed her arms. Listen, you want to come in to the United States, you need an address. How is the government supposed to keep track of you without an address? I dared not ask why they needed to keep track of me. But I did say, pleadingly, If he doesn’t answer his phone what can I do? (I am now truly hating myself for not having made one up.) YOU CANNOT ENTER WITHOUT AN ADDRESS, DO YOU UNDERSTAND? I said I did and she directed me to a pay phone. It was only because it was a childhood friend I was visiting that I recalled his parents’ phone number by heart and so could call and get the address.
On my return I was permitted to bypass the line. The director of traffic, the man in the blue blazer, held me back when the next available customs officer came free. It seemed I was to be sent back to the woman at booth five. Only she was not free. She was harassing some other traveler. Eventually I was sent to booth number four, adjacent to the woman’s. She had her back to me and there was bulletproof glass to muffle the sound. The young male officer at booth four politely asked me where I was going. The Bronx, I said, address in hand, ready. He did not ask for it and was already stamping my boarding pass. And that was that.
Until, that is, the lady officer behind him turned around and saw me. Through the bulletproof glass she asked the officer, DID HE GIVE YOU AN ADDRESS? The officer said no and I frantically raised up the paper the address had been written on to show her I had it. I told her that he had not asked for it. You have to understand. It does not matter that I had not done anything wrong. The important thing was that to this point I had been deferential, obliging and relatively subservient. Then I got stupid …Link here.
LIBRARY CHALLENGES FBI RECORDS REQUEST
A member of the American Library Association has sued the Justice Department to challenge an FBI demand for records, but the USA Patriot Act prohibits the plaintiff from publicly disclosing its identity or other details of the dispute, according to court documents released yesterday. The lawsuit comes as Congress prepares to enter final talks over renewal of the Patriot Act. But parts of the law, including provisions that could have an impact on libraries, have since come under fire. Justice Department and FBI officials have repeatedly declined to identify how many times Patriot Act-related powers have been used to seek or obtain information from libraries, but they have strongly urged Congress not to limit their ability to do so.
The suit, originally filed under seal in Connecticut on Aug. 9, focuses on the FBI’s use of a document called a “national security letter” (NSL), which allows investigators to demand records without the approval of a judge and to prohibit companies or institutions from disclosing the request. Restrictions on the FBI’s use of NSLs were loosened under the Patriot Act. The identity of the institution, the records being sought and numerous other details are edited out of the public version of the complaint released by the American Civil Liberties Union, which is a party to the lawsuit.
But the edited lawsuit reveals that the plaintiff is a member of the libraries association, that it provides “circulation and cataloging of library materials,” and that it allows “library patrons … to search library collections and check the status of their accounts.” The complaint also says the institution “provides Internet access for use by staff and patrons” and that the FBI was seeking “subscriber information, billing information and access logs” related to an unidentified target. ACLU lawyer Ann Beeson said the group is asking the court to lift a gag order that has been imposed in the case and said the dispute is directly relevant to the debate on Capitol Hill over the Patriot Act.Link here. New ACLU litigation highlights increased need for Patriot Act fixes – link.
PATRIOT ACT GRANTS EXCESSIVE POWERS
When John Ashcroft was the attorney general, he railed against the “hysteria” of critics of Section 215 of the Patriot Act, which allows the government to search library records. The number of times Section 215 had been used to search libraries was, Mr. Ashcroft declared, zero. But civil libertarians opposed the provision not because they knew it had been used – searches under Section 215 are secret – but because they expected it would be. It turns out that they were right to be concerned. The American Civil Liberties Union has just reported that the F.B.I. demanded library records from a Connecticut institution by using another troubling Patriot Act provision that authorizes a tool known as a national security letter. The A.C.L.U. says it cannot identify the institution or specify the nature of the request because of federal secrecy rules. But this is the first confirmed instance of the F.B.I.’s use of the Patriot Act to demand library records.
The Connecticut library inquiry follows on the heels of an American Library Association report that law enforcement officials have made at least 200 inquiries to libraries about reading materials and other internal matters since October 2001. In some cases, the officers issued subpoenas. In others, they relied on informal requests. Both Section 215, which expressly concerns libraries, and the far broader national security letter provision of the Patriot Act are so expansively written that they invite law enforcement to overreach and demand the confidential records of people with no connection to terrorism.
When Congress voted to reauthorize portions of the Patriot Act that were scheduled to expire, both the Senate and House adopted changes for both Section 215 and the national security letter provision. The Senate versions are far more protective of privacy rights than the House versions, which in some cases make the Patriot Act’s excesses considerably worse. When Congress reconciles these two approaches in a conference committee this fall, people who care about privacy and reasonable restrictions on law enforcement need to insist on changes that make the Patriot Act better, not worse.Link here.
A clean Patriot Act.
When Congress returns, an early order of business will be a conference committee to reauthorize key provisions of the USA Patriot Act. Both houses of Congress have passed bills similar in broad strokes. Both bills would give the administration what it most wants, reauthorizing permanently key law-enforcement and intelligence provisions that were enacted temporarily in the original law and are set to expire at the end of the year. Both, however, would also impose certain restrictions on the two most controversial provisions, which they would renew once again with a “sunset” provision. Both would tinker with the FBI’s authority to issue administrative subpoenas known as “national security letters”, injecting important procedural clarifications into the process. And both houses refrained from giving the bureau sweeping powers to issue administrative demands for documents. The bills would also require reporting by the administration on its use of Patriot Act provisions.
In key respects, however, the Senate bill is much preferable to the version passed by the House of Representatives. It retains sunset provisions for two additional non-Patriot Act authorities made permanent in the House bill – ones that warrant watching over time. It also contains stronger civil-liberties protections in a couple of areas.
Most important, however, is what the Senate bill lacks: dozens of completely extraneous add-ons that have only the most marginal connections to the bill’s purpose. The House bill would enact new law on cigarette smuggling, expand federal wiretapping authorities and the federal death penalty to a host of new terrorism crimes, authorize funding for first responders, make it easier to subject those convicted of terrorism crimes to being monitored for life following their release, and criminalize a host of activities related to seaports and transporting terrorists and hazardous materials. Some of these might be good ideas; some are likely to prove dreadful. None belong in this bill.Link here.
Poll: the more people know about the Patriot Act the less they like it.
Fewer than half of Americans know the purpose of the Patriot Act, and the more they know about it the less they like it, according to a poll. Fewer than half of those polled, 42%, are able to correctly identify the law’s main purpose of enhancing surveillance procedures for federal law enforcement agencies, according to the poll conducted by the Center for Survey Research and Analysis at the University of Connecticut. Almost two-thirds of all Americans, 64%, said they support the Patriot Act. But support dropped to 57% among those who could accurately identify the intent of the legislation.
The survey was intended to take a closer look at the high levels of public support the Patriot Act has gotten in various polls, said Samuel Best, the center’s director. “The Patriot Act has been a very visible piece of legislation,” Best said. “We wanted to see if people had an understanding of the act that differentiated it from the war on terrorism generally. Most people don’t distinguish the Patriot Act from the war on terror in general.”
The House and Senate have voted to extend provisions of the Patriot Act that were set to expire at the end of this year, making many of those provisions permanent. A conference committee is scheduled to try this fall to work out differences in the House and Senate versions of the legislation.Link here.
Gonzales faults Senate version of Patriot Act legislation.
Attorney General Alberto R. Gonzales criticized a Senate bill that would place new restrictions on law enforcement in the USA Patriot Act, saying the legislation would hamper the government’s ability to prevent terrorist attacks. Gonzales, during a meeting with editors and reporters at The Washington Post, said he favors a competing House version of the antiterrorism law that includes fewer restrictions on the government.
Gonzales’s remarks represent the administration’s sharpest criticism of the Senate legislation, which was approved by unanimous consent of the GOP-controlled Senate and co-sponsored by the influential chairman of the Senate Judiciary Committee, Sen. Arlen Specter (R-Pennsylvania). Until now, Justice Department officials have signaled their preference for the House bill while avoiding explicit criticism of the Senate version.
Gonzales said that the Senate bill’s tighter provisions would make it too difficult for investigators to conduct secret searches or obtain “roving wiretaps” in terrorism investigations. He also said the threshold for obtaining business records, including those held by libraries, would be set too high by the Senate bill.Link here.
AUSTRALIAN POLICE WANT POWER TO TRACK MONEY
The Australian Federal Police wants powers to examine financial records and scan large credit data banks so it can track individuals and organisations suspected of involvement in terrorism. The change would allow the AFP, working with banks and financial institutions, to pick up unusual money transactions which could help thwart a terrorist attack or assist in identifying international terrorist networks. Faster and more comprehensive monitoring of financial data bases has emerged as a key proposal in the Howard Government’s wide-scale counter-terrorism review in the wake of the July 7 London bombings.
The review is also examining Australia’s existing legal definitions of what constitutes a terrorist and an act of terrorism, as well as a comprehensive look at transport security. Next month’s counter-terrorism summit, to be chaired by John Howard, will also consider a common, nationwide protocol to cover CCTV coverage in key transport modes and urban areas including commercial offices, as well as new initiatives to enable ASIO to track the travel movements of inbound visitors to Australia.
Another option being considered for the AFP would involve control orders on people considered a security risk. A control order would restrict the movement of people of concern to counter-terrorism agencies, including the AFP and ASIO. It would make it mandatory for nominated people to report regularly to police, allowing less intensive surveillance regimes. Changes to regulations governing access to financial records would allow the AFP to work outside existing procedures which only authorise access after the production of a search warrant.
Australia’s banks have been traditionally reluctant to consider easing rules on access to individual banking records, due to strict privacy regimes. But banking leaders in recent weeks, including the chief executive of the National Australia Bank, John Stewart, have recently indicated a genuine willingness to co-operate with security agencies.Link here.
SUPERDOME OF SHAME
Watching news coverage of the refugees trying to enter the Louisiana Superdome in New Orleans for safety from the approaching force-five Hurricane Katrina, I was incredulous how the people attempting to enter the stadium were being treated by the National Guard troops and local police. The people were made to stand for hours outside in the awful Louisiana climate while they were admitted one or two adults at a time so they could be searched “for firearms and alcohol.”
The frail elderly, many grasping walkers and others in wheelchairs seemed to be near collapse. They, along with hundreds of small children needing water and rest-room relief, were forced to wait as long as four hours to get to safety. It was often repeated during the video reports that the last time the Superdome was used as a hurricane shelter, a few of the temporary occupants removed some furniture. But this time, they had a large security force on hand, so that was NOT going to happen again, no-siree-bob. There were THOUSANDS of poor, mostly black citizens of the lower Louisiana area, many of them little children and sickly elderly, being forced to stand for hours while the government violated their civil rights with forced searches that were patently unconstitutional, unjust and unreasonable under the dire circumstances. “Don’t want to be searched? That’s okay … now turn around, go outside and die!” Big choice.
Can you imagine New Orleans’ wealthy elite meekly submitting to such microscopic searches of their persons and property for drugs? Heads would roll. But poor people who had no money to escape the deadly storm’s onslaught had no choice. They had nowhere else to go to save their children’s and parents’ lives. They were humiliated just for trying to survive. Their grandfathers and grandmothers suffered as slaves on Southern plantations decades ago, while today, they suffer as slaves to the state, the state that cancels their human rights and dignity in the name of “protecting” them.
Nothing has changed in the South. Poor people of are still being herded and treated as criminals because of the color of their skin. The Sheriff and Louisiana National Guard knows the profile of likely drug users: Black people and anyone associating with them. They were searched just as if they were entering a state penitentiary visiting a death-row prisoner. Maybe the refugees would have fared better if they had had season tickets in their hands. Think about it. They can allow in 30,000 screaming fans with $50 bills and costly NFL tickets in their hands in a few minutes, but poor black people fleeing for their lives, four hours. Four HOURS!
Hurricane Katrina can certainly destroy the environs of the Louisiana and her neighboring states, but that can all be rebuilt. What will never be rebuilt is the dignity of the poorest citizens of that region, since the government acted with a greater destructive force than a hurricane. The lamp of freedom has been blown out by force-five bureaucrats, their sycophants and their head-embedded media enablers who will insure that it will never get re-ignited. For our own good, of course.Link here.
NOT A CHRISTIAN
Pat Robertson, host of “The 700 Club”, is not a Christian. No man who publicly advocates cold-blooded murder for political reasons can claim to be a follower of Jesus Christ. Robertson did that on his television show, saying it would be cheaper to murder the president of Venezuela than to overthrow him with a war. The president of Venezuela, Hugo Chavez, is a frequent critic of President George Bush and the United States. He is also democratically elected. It is funny how many people in the American elite who profess to advocate democracy tend to change their minds when the results of democracy do not suit them.
For a long time, I have not believed that Robertson is a Christian. I have this old-fashioned idea that rich preachers are incompatible with Christianity. If you do not already know this, most of the televangelists spend an inordinate amount of their time and efforts fundraising and living in the lap of luxury. I assume darn few of them will squeeze through that eye of the needle that Christ spoke of in regard to a rich man getting into heaven. Robertson is a politician who uses Christianity as a source of income and as a cover for his political goals.
Mr. Robertson’s followers now have a clear choice: Are they going to follow the teachings of Christ or the teachings of Robertson? The two are incompatible. No one can be a Christian and a booster of political assassination, too. Unlike many people in the political wars, I do not condemn what the left calls the Christian Right. Most of these people are just plain Christians, and in these decadent times, simple Christian morality is certainly deemed to be an “extremist” position by the debauched secularists. To be honest, humble, faithful to one’s spouse and respectful of human life certainly strikes the far left as being “out of the mainstream”, which is exactly where decent people want to be when the mainstream connects the toilet to the cesspool.
Nevertheless, Christians should publicly disavow people like Robertson who bring the religion into disrepute. Christ lived in the Roman Empire and never advocated its reform or overthrow. His message was, “See to your own soul.” The idea of involving Christianity in political wars, assassinations or as allies of Zionism or any other “ism” is heresy. Christianity is about the next world, not this one.Link here.
HOW NEW ORLEANS WAS LOST
There were not enough helicopters to repair the breached levees and rescue people trapped by rising water. Nor are there enough Louisiana National Guardsmen available to help with rescue efforts and to patrol against looting. The situation is the same in Mississippi. The National Guard and helicopters are off on a fool’s mission in Iraq.
The National Guard is in Iraq because fanatical neoconservatives in the Bush administration were determined to invade the Middle East and because incompetent Secretary of Defense Rumsfeld refused to listen to the generals, who told him there were not enough regular troops available to do the job. After the invasion, the arrogant Rumsfeld found out that the generals were right. The National Guard was called up to fill in the gaping gaps. Now the Guardsmen, trapped in the Iraqi quagmire, are watching on TV the families they left behind trapped by rising waters and wondering if the floating bodies are family members. None know where their dislocated families are, but, shades of Fallujah, they do see their destroyed homes.
The mayor of New Orleans was counting on helicopters to put in place massive sandbags to repair the levee. However, someone called the few helicopters away to rescue people from rooftops. The rising water overwhelmed the massive pumping stations, and New Orleans disappeared under deep water. What a terrible casualty of the Iraqi war – one of our oldest and most beautiful cities, a famous city, a historic city. Distracted by its phony war on terrorism, the U.S. government had made no preparations in the event Hurricane Katrina brought catastrophe to New Orleans. No contingency plan existed. Only now after the disaster are FEMA and the Corps of Engineers trying to assemble the material and equipment to save New Orleans from the fate of Atlantis.
Even worse, articles in the New Orleans Times-Picayune and public statements by emergency management chiefs in New Orleans make it clear that the Bush administration slashed the funding for the Corps of Engineers’ projects to strengthen and raise the New Orleans levees and diverted the money to the Iraq war. How can the Bush administration be so incompetent as to expose Americans at home to dire risks by exhausting American resources in foolish foreign adventures? What kind of “homeland security” is this?Link here.
THE U.S. COLLAPSES: A SCENARIO
With the science of psychohistory we can predict the future. We can map out the next 1000 years in detail, and the next 30,000 in outline. Equipped with mathematical models of mass behavior, psychohistorians such as Hari Seldon, of Streeling University, can predict the fate of nations. But neither psychohistory nor Seldon is real. They were invented by Isaac Asimov in his famous Foundation series, which describes the fluctuating fortunes of the Galactic Empire. Now, however, a real-life Hari Seldon has developed his form of psychohistory. In September, ecologist Peter Turchin, of the University of Connecticut, publishes War and Peace and War, a book in which he explains much of pre-industrial world history with his bold and controversial theory of the rise and fall of empires, using the same kind of mathematics that Turchin has used to study ecosystems.
Turchin believes history can be a science, with laws as inexorable as the law of gravity. He claims to have found the general mechanisms that cause empires to wax and wane – laws as true today as they were during the Roman Empire. So the world order is in a state of perpetual change and the global powers today will inevitably be replaced. Turchin’s theory is anathema to some historians. Some regarded his assumptions about human behaviour as simplistic. “Social theory is a minefield, even for those experienced in it,” said Joseph Tainter, a U.S. historian who has studied the collapse of civilizations. Others are opposed to the idea that history has rules analogous to those in science, and that the historian’s aim is to discover them. “History is our interpretation of past thoughts that happened to be written down or otherwise preserved,” says historian Niall Ferguson.
In the second century BC, the Greek writer Polybius proposed that societies are like organisms, which are born, grow, age and die, leading him to predict the decline of the Roman Empire 600 years before the event. The idea of a mechanical science of history became popular in the 18th century, and by the 19th century was held by most “progressive” thinkers. Turchin’s title alludes to Tolstoy’s speculations in War and Peace that history is deterministic, directed by “forces" such as those invoked by Isaac Newton. And Karl Marx echoed Polybius’s belief in cyclic history in his economic theory of why a proletarian revolution was inevitable. But others deplored this reduction of the richness and complexity of history to a clockwork caricature. Turchin knows he is entering a battleground. But his experience in the mathematical modeling of animal populations, such as voles, has given him confidence that the complex processes of human interactions can be captured by such methods too.
War and Peace and War attempts to explain some of history’s grand narratives: the rise and fall of Rome, the expansion of medieval European powers, the Russian conquest of Siberia. Turchin believes these empires were the product of one factor: social cohesion, the willingness of groups to co-operate against opponents. He calls this “asabiya”, an Arabic word denoting “mutual affection and willingness to fight and die for each other”. Using modern understanding of how co-operative behaviour develops in groups of organisms, Turchin’s models suggest that asabiya becomes particularly strong on the frontiers of empires, where two civilisations confront one another. This, he says, was how a small group of Cossacks was able to defeat a much larger army of Tatars in Siberia in 1582. Thus, the “meta-ethnic faultlines” between civilisations are “asabiya incubators” from which new empires spring. Here, either you unite or you die.
The U.S. has all the hallmarks of an empire, Turchin says, and it is one in which asabiya is showing its dark side in nationalism and xenophobia. “Today the most violent clash of civilizations occurs on the meta-ethnic frontiers of Islam with the Western, Orthodox, Hindu and Sinic civilisations,” says Turchin. But if his theory is right, it will be in these conflict zones, such as the borders of Europe, that the next great empires will arise.Link here.
THE WAR FOR THE FUTURE
What a surreal moment – this faded end-of-summer 2005. We are locked in an evil lost war of staggering costs. Some flail at the atrocity in a cause that seems equally lost. Most play on in the ebbing season’s sun, oblivious to reckonings. In Washington rules the worst regime in memory. Yet it falls to a fiercely bereaved 48-year-old mother, camping beside a dusty ditch in Texas, to embody the conscience of the culture, at least until the media move on. The regime in its outrage struts essentially unopposed in our supposed democracy. Protest rises powerless. The oblivious go uninformed, unled.
Ignorant of the issues, cravenly afraid of risking privilege for principle, hostage to corrupt advisors and a corrupted calculus of national interest, Democrats not only mistake the public mood and fail the minimal duty of opposition, but join the folly. From Hillary Clinton to Barack Obama, Capitol Hill barons to camp-following bloggers, they stand bravely for more fodder more efficiently fed to the calamity, huddling earnestly to the right of the most egregious right-wing aggression in our history. Add to the Iraqi disaster the defining debacle of our second intellectually and morally derelict party.
Even if Democrats poll to find courage convenient, as some surely will, it will do us little good. Like the odd rebel Republicans (Senator Hagel & Co., who exhibit, ironically, what conservatives always said about enlisting more integrity than the other side of the aisle), they will find this Presidency peculiarly, frighteningly immune to advice and consent. There is quixotic talk about George W. Bush reprising Lyndon Johnson or Richard Nixon, variously undone by intra-party revolt, demonstrations, defection of the Establishment, scandal.
We must be clear. Bush is no Johnson or Nixon. This president is not simply the least competent ever thrown up. He is also the most pathological. Every shred of evidence of the man and his rule, every witness, leak, and gesture reek of it. Freshman psychology students and amateur therapists smell it instantly. To quote a distinguished analyst who shall remain anonymous for the sake of his Republican patients:
George W. is a narcissistic personality. He is self-referent. He sees things only from his point of view – and by extension sees and represents the America that reflects it. He is able to create a seamless ball into which nothing else can penetrate. As with other narcissistic personalities, he lives his entitlement and grandiosity – in his case even seeing himself as fulfilling God’s wishes on earth. He does not need to check any other reality. He knows that what feels right to him is right for everyone. The rules do not apply to him (college, the reserves, etc.) – only to those who need rules to do what is right.
The cowardice and blindness, craftiness and stupidity of the war policy, and of the whole myth-encrusted and corrupt mentality around it, will persist so long as Bush and all who used and accepted him remain in office. Despite the seeming death of politics, we have never known a crisis and opportunity more political. The moment cries out for politics fought as never before. Fight now. Fight everywhere. Take the battle first and foremost to where power lives.
Like the RAF in 1940, we must take on even the impossible. In the underlying volatility of the American electorate, every challenge is a threat, every spark a potential burn clear. Politicians know this. No Democrat will face a primary challenge on the war, no Republican will face it in the general, without risk. No progressive will run without gain. No lesson will be lost. The campaign everywhere is simple. Stop the dying. Stop the lying.
None of this will happen in old ways and institutions under yesterday’s men. We will never have a chance to stop the dying and lying until we stop the irrelevant and self-indulgent, the jockeying and empty debating. Most important, our fatal attraction, we must go unseduced by the Democrats, who have made seduction and abandonment of progressives a lucrative career. We lost the invasion of Iraq and the election of 2004, not our souls. We lost battles. The war for the future – America’s and the world’s – is only beginning. But there can be no more waiting to fight. No truce with time nor its accomplice.Link here.
THE STATE AND THE FLOOD
“No one can escape the influence of a prevailing ideology,” wrote Ludwig von Mises, and Gulf Coast residents know precisely what it means to be trapped – ostensibly by a flood but actually by statist policies and ideological commitments that put the government in charge of crisis management and public infrastructure. For what we are seeing in New Orleans and the entire Gulf Coast region is the most egregious example of government failure in the United States since September 11, 2001.
Mother Nature can be cruel, but even at her worst, she is no match for government. It was the glorified public sector, the one we are always told is protecting us, that is responsible for this. And though our public servants and a sycophantic media will do their darn best to present this calamity as an act of nature, it was not and is not. Katrina came and went with far less damage than anyone expected. It was the failure of the public infrastructure and the response to it that brought down civilization. The levees that failed and caused New Orleans to be flooded, bringing a humanitarian crisis not seen in our country in modern times, were owned and maintained by the Army Corps of Engineers. The original levees surrounding this city below sea level were erected in 1718, and have been variously expanded since.
But who knew that a direct hit by a hurricane would cause them to break? Many people, it turns out. Ivor van Heerden of Louisiana State University, reports Newsday, “has developed flooding models for New Orleans, was among those issuing dire predictions as Katrina approached, warnings that turned out to be grimly accurate. He predicted that floodwaters would overcome the levee system, fill the low-lying areas of the city and then remain trapped there well after the storm passed – creating a giant, stagnant pool contaminated with debris, sewage and other hazardous materials.” He is hardly some lone nut. National Geographic ran a large article on the topic last year that begins with a war-of-the-worlds scenario that reads precisely like this week’s news from New Orleans. It is the Army Corps of Engineers that has been responsible for the dwindling of the coastline that has required the levees to be constantly reinforced with higher walls. But one problem: no one bothered to do this since 1965. That is only the beginning of the problems created by the Corps’s levee management, the history of which was documented by Mark Thornton following the last flood in 1999.
Only the public sector can preside over a situation this precarious and display utter and complete inertia. What do these people have to lose? They are not real owners. There are no profits or losses at stake. They do not have to answer to risk-obsessed insurance companies who insist on premiums matching even the most remote contingencies. So long as it seems to work, they are glad to go about their business in the soporific style famous to all public sectors everywhere. And failure of one structure has highlighted the failures of other structures. The levees could not be repaired in a timely manner because roads and bridges built and maintained by government could not withstand the pressure from the flood. They broke down.
And again, it is critical to keep in mind that none of this was caused by Hurricane Katrina as such. It was the levee break that led to the calamity. Indeed, at 4 p.m. on Monday, August 29, all seemed calm, and reports of possible calamity seemed overwrought. Two hours later the reports began to appear about the levee. A period of some 12 hours lapsed between when the hurricane passed through and when the water came rushing into the city. There is some dispute about precisely when the levees broke. Some say that they were broken long before anyone discovered it, which is another outrage. There was no warning system.
That is when the disaster struck. The municipal government itself relocated to Baton Rouge even as the city pumps failed as well. Meanwhile, the Army Corp of Engineers apparently had no viable plan even to make repairs. Many bloggers had the sense that the public sector essentially walked away. But the police and their guns and nightsticks were out in full force, not arresting criminals but pushing around the innocent and giving mostly bad instructions. The 10,000 people who had been corralled into the Superdome were essentially under house arrest from the police who were keeping them there, preventing them even from getting fresh air. A day later the water and food were running out, people were dying, and the sanitary conditions becoming disastrous. Finally someone had the idea of shipping all these people Soviet-like to Houston to live in the Astrodome, as if they are not people with volition but cattle.
After evacuations, the looting began and created a despicable sight of criminal gangs stealing everything in sight as the police looked on (when they were not joining in). Now, this scene offers its own lessons. Why don’t looting and rampant criminality occur every day? The police are always there and so are the hoodlums and the criminals. What was missing that made the looting rampage possible was the bourgeoisie, that had either left by choice or had been kicked out. It is they who keep the peace. And had any stayed around to protect their property, we do not even have to speculate what the police would have done: Arrest them!
Now, in the coming weeks, as it becomes ever more obvious that the real problem was not the hurricane but the failure of the infrastructure to work properly, the political left is going to have a heyday. They will point out that Bush cut spending for the Army Corp of Engineers, that money allocated to reinforcing the levees and fixing the pumps had been cut to pay for other things, that we are reaping what we sow from failing to support the public sector. The ever-stupid right will come to the defense of Bush and the Iraq War that has completely absorbed this regime’s attention.
But this is a superficial critique (and defense) that does not get to the root of the problem with public services. NASA spends and spends and still cannot seem to make a reliable space shuttle. The public schools absorb many times more – thousands times more – in resources than private schools and still cannot perform well. The federal government spends trillions over years to “protect” the country and cannot fend off a handful of malcontents with an agenda. So too, Congress can allocate a trillion dollars to fix every levee, fully preventing the last catastrophe, but not the next one. The problem here is public ownership itself. But public owners have no real stake in the outcome and lack the economic capacity to calibrate resource allocation to risk assessment. In other words, the government manages without responsibility or competence. Can levees and pumps and disaster management really be privatized? Not only can they be, but they must be if we want to avoid ever more apocalypses of this sort.
This crisis ought to underscore a point made on these pages again and again. Being a government official gives you no special insight into how to best manage a crisis. Indeed the public sector, with all its guns and mandates and arrogance, cannot and will not protect us from life’s contingencies. It used to be said that infrastructure was too important to be left to the uncertainties of markets. But if it is certainty that we are after, there is a new certainty that has emerged in American life: in a crisis, the government will make matters worse and worse until it wrecks your life and all that makes it worth living.Link here.
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