W.I.L. Offshore News Digest for Week of April 14, 2008

THE DE-FLATTENING OF THE WORLD

Three years ago Thomas L. Friedman's book The World is Flat became a de rigueur read among the intellectual, socialist-lite class who regularly read the New York Times with bated breath. Bill Bonner mercilessly lampooned Friedman and his ideas to great effect in his "Daily Reckoning" columns -- see, e.g., this one -- and also in Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, a recent book he co-wrote with Lila Rajiva.

Which is not to say that the main thesis of Friedman's book was a pure creation with no reality-based catalyst. Clearly the world is more interconnected than ever, which is leading to personal and business relationships across space that would not have happened before. But now, says Martin Hutchinson, this trend towards "flatness" is going through a correction of sorts. And the results of that will be mixed, he says.

"A world full of bilateral trade agreements is not flat but mildly bumpy," Hutchinson writes on the de-flattening of the trade in physical goods. "A world in which even these have become impossible requires serious landscaping." Moreover, the internet is not living up to its promise as the great knowledge leveler either, as certain countries have succeeded in at least partially walling themselves off from the outside world.

"The world is flat" declared New York Times columnist Thomas L. Friedman in 2005. His book was full of heart-warming anecdotes about noble Third World businessmen being brought together through the Internet. In terms of hard analytical truth it was something of a stretch even then. However, it is now certain that the world has started de-flattening, becoming bumpier by the day. Much though one likes to diss New York Times columnists, this is economically not entirely a good thing.

Contrary to the views of the globalization extremists, there are some clear benefits to this de-flattening. The "level playing field" so beloved of academic economists who wish for universal free trade and unrestricted immigration resembles in reality not an orderly soccer pitch but something akin to the Russian steppe with winter approaching: bleak, infinite and entirely without tree cover. Needless to say, some previous versions of competition -- say 1950s Detroit -- bore more resemblance to the bowling green in a well-kept Oxbridge college, with a high wall round the edge and guard dogs to keep out the unwashed. However the advent of truly global competition since 1990 has demonstrated to the Western workforce that removing barriers to entirely free competition can be highly detrimental to their living standards and job security.

How much of the decline in living standards is due to "entirely free competition", as opposed, e.g., to a litary of counterproductive U.S. government policies too long to bother enumerating here, is not clear. It is dead certain that policy measures which resulted in increased current consumption -- whether for marble countertops or bombs -- at the expense of reinvestment in the capital stock which would have supported higher future consumption, left the average U.S. domestic business ill-prepared to compete. Better production facilities are the only hope for competing with competitors with far lower labor costs.

It is thus unsurprising that a number of free trade shibboleths are being questioned as never before. Unfortunately the new protectionism shows every sign of making no distinction between desirable and undesirable barriers to free movement of goods, capital and persons. Instead it is constructing impenetrable walls whose benefit even to their builder is dubious, and whose cost to the world economy is undoubted and immense.

Of all the new barriers to free trade, the most damaging are probably export restrictions, as on rice in Egypt, India and Vietnam, or export tariffs, as in Argentina. Rice export restrictions have had the effect of doubling the world market price of rice in three months, to the immense suffering of the Third World's urban masses. They are the product of an ideology of scarcity, in which resources are thought to be severely limited and trade is viewed as a negative factor in the welfare of a country's inhabitants. Not only do they damage the economy of commodity buyers, they are even more damaging to the country that imposes them. Nevertheless, in a world in which corn becomes scarce because of massive U.S. ethanol subsidies, they have made their malign appearance, and they will not be eliminated until food and other commodity prices decline.

Agriculture subsidies were a creation of the last major recession 70 years ago, and they seem fated to remain with us whatever the economic weather. They made a certain amount of sense as an income protection program for small farmers during the Great Depression; they make far less sense now. Nevertheless it was for the sake of agriculture subsidies that the U.S. and the E.U. killed the Doha round of trade talks, which had offered the best hope of putting world trade on a basis of openness and equality between rich and poor countries.

The Doha round has now apparently been replaced with a network of bilateral arrangements. These make sense politically but not particularly economically. They are also by definition de-flattening, since in a bilateral trade agreement both parties give each other benefits and tariff reductions that they do not extend to other countries. In any case, the AFL/CIO and its cheerleaders among the Democrats in Congress appear to have found a way to kill even bilateral trade agreements, by demanding U.S. levels of union protections, benefits and environmental restrictions in the relatively poor countries with which they are generally negotiated. A world full of bilateral trade agreements is not flat but mildly bumpy; a world in which even these have become impossible requires serious landscaping.

Even more egregious than agriculture subsidies are the newly fashionable environmental subsidies, whether paying farmers to refrain from farming or paying them excessive amounts to plant crops that can inefficiently be converted to ethanol, at an outcome in carbon dioxide emissions significantly worse than regular gasoline. In the U.S. these subsidies are the product of the exceptional cynicism and corruption of U.S. politics over the last decade (to be precise, since Newt Gingrich was forced to resign the House Speakership in November 1998.) It is thus hardly surprising that their direct costs have been considerable and their indirect costs enormous. They began by sparking off a tortilla subsidy program in Mexico and are now producing food export restrictions in much of the Third World.

Subsidies to consumption of food, gasoline and other favored commodities, which had been thought moribund in the free trade world of the 1990s, have been making a comeback. No longer restricted to the likes of Cuba and Venezuela, such subsidies now extend across most middle income countries, allowing consumers, generally middle class, to buy gasoline and food products exceptionally cheaply. Needless to say, these subsidies are hugely expensive for national budgets, damage local wholesalers of the product concerned (or, in the case of oil, exploration companies in such places as India) and represent a sharp move away from the primacy of the price mechanism. There is no sign whatever of their disappearance.

On the intellectual front, the most important barrier to globalization is the increasing tendency of authoritarian regimes to censor the Internet. Countries such as Iran offer almost no access to the world-wide Internet at all, restricting communications speeds and blocking access to the Internet altogether during periods of political tension. China too has largely domesticated its Internet, using its enormous domestic market as leverage to invent Chinese equivalents of such companies as Google (Baidu) and E-Bay (Alibaba) while heavily restricting its citizens' access to the outside world. Even in Western Europe, political correctness rules differ from country to country, and force international websites to adopt bizarre domestic practices. Globally, the Internet is no longer a "flat" institution as Friedman claimed. It has become thoroughly bumpy, with a number of impenetrable walls.

As Friedman pointed out, foreign investment had been for many years an important "flattening" element in the world economy. Multinational companies not only import goods and services into countries in which they invest, they import know-how and labor practices, so that salaries for similar jobs become more equal worldwide, and working conditions in poor countries improve (even though child labor may be common in say Indonesia, a U.S. or EU multinational cannot afford to be seen condoning it.)

However, in the last few years some countries have begun to conduct their foreign investment in the spirit of Cecil Rhodes rather than Adam Smith, seeking to monopolize natural resources, use trade as a political weapon and gain political power through leverage in foreign country economies. Blocking the Chinese investment in Unocal appeared paranoid in 2005, it seems less so now, while the Dubai Ports fiasco, in which a minor subsidiary investment turned into a major political battle also seems to have been a harbinger of things to come.

When Gazprom regularly disrupts gas supplies to its neighbors, while seeking to acquire new supplies (entirely unnecessary for its existing business, given Russia's enormous gas reserves) in Libya, Algeria and Nigeria, it is clearly motivated not by simple economic goals but by the desire to acquire a monopoly or near-monopoly of gas supplies to Western Europe. Chinese investments in Africa and Venezuela are somewhat more benign in their motivation, seeking to tie up the supplies of energy and commodities that China will need in the decades ahead by doing business with regimes that the West will not deal with, or by turning a blind eye to local corruption, torture and other misdeeds.

Gazprom's appears likely to be a successful political strategy against the limp push-back of the E.U. China's strategy also appears more than likely to be successful commercially, since rogue regimes know that any attempts to damage Chinese interests will result in several divisions of the Red Army arriving, rather than a mere diplomatic protest or lawsuit. Nevertheless, neither strategy is working towards a level playing field or a flat world. Both are seeking to construct Great Walls behind which their own national interests can flourish.

Finally there is mass immigration, to Friedman the most world-flattening innovation of all. He is right. Unlike trade, mass immigration has the potential to equalize wage rates between rich and poor countries within no more than a generation. The huge area of local services, that provides a haven for the low-skilled which is immune to international competition, quickly succumbs to mass immigration.

Of course, any such rapid equalization of wages across the globe would involve a catastrophic decline in the living standards of the less able populations of rich countries. There is every sign that these oppressed helots are waking up to this. In the U.S., not only was last year's immigration amnesty legislation defeated easily, but there is now noticeable pushback against expansion of the H1B visa program, under which skilled young people from the Third World get the chance to practice their trades in the U.S. market, competing against local folk.

As Dean Baker of the Center for Economic and Policy Research has pointed out, the H1B program extends only to a limited range of occupations, and does not for example affect lawyers. It is thus little surprise that the remuneration for a newly minted computer scientist with a PhD from a good college is less than half that of a less credentialed junior commercial lawyer. Immigration globalists will point out that the lawyer may deal with Wall Street, but the computer scientist deals with Silicon Valley, equally a source of unimaginable riches and innovation in the last decade. Little wonder therefore that there is a shortage of U.S. engineers. They are all studying to be commercial or trial lawyers, even if they are somewhat less fitted for this role. The free market works!

The recommendations for policymakers from all this naturally bear little resemblance to what policymakers are currently doing. On trade, a return to the Doha round seems highly desirable, and if agriculture subsidies have to be sacrificed to achieve this, that would be another reason to cheer. The autarkic policies of Russia and China are most effectively battled by low energy and commodity prices, which can best be produced by a sharp increase in U.S. interest rates, naturally accompanied by corresponding moves elsewhere.

Higher global real interest rates will also increase the relative as well as absolute cost of capital for emerging markets, restoring some of the U.S.'s historic overall cost advantage (emerging markets will then have cheaper labor but more expensive capital.) Of course in this area the high-saving nations of the richer parts of East Asia (Japan, Taiwan, South Korea and Singapore) will benefit even more than the U.S., but there should in this world be some reward for the thrifty over the profligate.

To our thinking, it is indisputable that the average U.S. citizen needs to save more now and consume less in order to avoid a precipitous decline in future living standards. Hidden behind aggregate numbers such as "consumption" and "government spending" is the very real fact that the U.S. economy (conceiving of it as a single entity) has been eating its seed corn for a long time. The rest of the world's willingness to lend the U.S. corn for current consumption has disguised this, but the as that willingness fades the reality will be unavoidable.

On immigration, since U.S. politicians are paid to represent the interests of their constituents and not those of foreigners however impoverished and photogenic, they should strengthen enforcement against illegal immigration and reduce rather than increase the H1B visa quota -- or alternatively keep the quota as it is, but extend its applicability to those professions such as lawyers that have better lobbyists than the unfortunate research scientists. That will ensure that U.S. university entrants can choose their field of study based on their abilities and interests, and not on whether or not graduation will plunge them into competition with the teeming millions of India and elsewhere.

The world is not flat; it was flattening but has now got lumpier again. On the whole, that makes the scenery more interesting and gives better protection against storms.

SINGAPORE: THE SWITZERLAND OF ASIA

As the E.U. pressures Switzerland and its smaller European financial center competitors to be less protective of their customers' privacy, it is inevitable that clients will take their capital elsewhere. The effects are already measurable. According to Chris Mayer, Barron's reports that Singapore is the world's second largest banking center, still well behind Switzerland -- with a 6% share of the private banking business vs. Switzerland's 18% -- but closing fast, growing 30% per year.

“The city of Singapore was not built up gradually, the way most cities are, by a natural deposit of commerce on the banks of some river or at a traditional confluence of trade routes. It was simply invented one morning early in the nineteenth century by a man looking at a map. 'Here,' he said to himself, 'is where we must have a city.'” ~~ J.G. Farrell, The Singapore Grip

Farrell's tale is about Singapore in 1939. It takes place in the last days before Japanese occupation. The novel captures the early hustle and bustle of Singapore, its sights and smells. He writes, "of incense, of warm skin, of meat cooking in coconut oil, of honey and frangipani, and hair-oil and lust and sandalwood and heaven knows what, a perfume like the breath of life itself."

The man who looked at a map, as Farrell says in his passage, was Sir Thomas Raffles, the founder of the city of Singapore. Raffles's vision was to add another trading post in the growing British Empire. It became much more than that. I think it is safe to say it has become more than Raffles could have ever imagined.

Today, it is becoming another Switzerland. As the Western governments look to crack down on tax havens, the money moves elsewhere. In the early days of the 21st century, the preferred haven is Singapore.

The story of Singapore is a story of how a place grows rich in the 21st century. One way, Singapore's way, is to master the arts of international trade. Be friendly to wealth and it will beat a path to your door. ...

As with most places, Singapore owes its success, at least partially, to accidents of history. Singapore has a natural deep port, which always helps. But prosperity usually needs a little extra nudging to get out of bed in the morning. The discovery of tin in nearby Malaya in 1848 was one such nudge. It helped make Singapore an important port for the tin trade. The opening of the Suez Canal in 1869 was another. It cut traveling time between Asia and Europe dramatically. As steamships replaced clipper ships, so the world shrank a little further. Singapore also became one of the world's largest coaling stations.

As a cog in the British Empire, Singapore was indispensable. As Gretchen Liu writes in her history of the city, Singapore was, "an important link in a chain that stretched from Gibraltar, through Malta, Suez, Aden, India and Ceylon, and to Hong Kong and Australia."

Singapore soon became the world's largest supplier of rubber, helped by Ford's assembly line in 1913, which kicked off a boom in rubber. By 1919, half of the world's rubber went through its ports. ... Even in the 1950s, rubber and tin were still important exports, along with coconut oil, palm oil, tinned pineapple, sago flour, rattan and spices.

So you see, the main business of Singapore has always been trade. It has also always been a place made up of a variety of peoples from a variety of cultures. Chinese, Indians, Malays and Europeans all flocked to Singapore. Immigrant labor laid down the electric cables, tapped the rubber trees and built the roads, among other things. In the process, Singapore became a unique mix of East and West. Singapore became a hinge upon which the two worlds turn.

Joe Studwell's new book, Asian Godfathers, looks at the successes of various entrepreneurs in Southeast Asia. Singapore figures in the larger story. Studwell's comments shed light on the causes of Singapore's successes. Many of those causes still serve it well today.

Singapore's success is due in part to, as Studwell says, "tariff-free trade (with few or no questions asked about what is being traded) and ... places to park money (with few or no questions asked about where the money came from)."

In this, Singapore performs a "simple economic trick." Be a little kinder to money than your neighbors and you will attract the money flow. Though Singapore has a long history of trading and smuggling, its reputation as an Asian Switzerland -- as a place to store capital and a financial services hub -- is a more recent development.

As the European Union brings pressure on Switzerland to block tax evasion, Singapore has taken up that slack. The number of foreign private banks in Singapore has more than doubled, from 20 in 2000, to 42 currently.

Barron's reports that Singapore is the world's second largest banking center, behind Switzerland. Singapore's worldwide share of the private banking business is around 6%, compared with Switzerland's 18%. But Singapore is growing 30% per year. Private banking assets are up 6-fold from 1998. Today, Singapore is home to about $300 billion, according to Citigroup (which gets 1/3 of its private banking business from Asia; the folks at Citigroup should know).

All that money needs "handlers" -- accountants, investment advisers and other specialists. It is why the private banking business is so excited about being in Singapore. As an investor, it is a little harder to invest in this theme specifically. I am not particularly keen on owning a large financial conglomerate because I like its Singapore exposure.

Beyond that, though, there is another layer to Singapore's 21st century prosperity that I find fascinating. Singapore is also a hub for water companies, a sort of Silicon Valley of water. ... There are over 100 water treatment stocks there, with a total market cap in excess of $50 billion, according to Jim Rogers, author of A Bull in China. ...

The old trading post dreamed up by Raffles continues to be a hotbed of international trade. The Port of Singapore, after all, is the world's largest. But it has also become a private banking boomtown and a hub of the growing water sector. Western countries could learn a thing or two about how to get rich by studying Singapore's playbook. And investors ought to take a look at putting money to work in Singapore. Raffles, I think, would be pleased.

THE WORLD’S TOP TAX HAVENS

This lightweight but still interesting Forbes article offers a quick introduction to a few why's and a few how's of asset protection. It also implies that the U.S. is a serious asset protection haven for those worried about being wiped out by a lawsuit, although it later qualifies this a good deal.

When people think of tax havens, they usually picture the Swiss Alps or Caribbean islands. But traditional venues like Switzerland, the duchies of Lichtenstein and Luxembourg and Caribbean paradises like the British Virgin Islands are finding competition from the U.S., where lawyers in seven states, such as Nevada and Alaska, are muscling in, looking to grab business from the world's wealthy.

They are peddling the concept of a "self-settled spendthrift trust," an irrevocable trust that is created by its beneficiary and is designed to preserve wealth. A consequence of that is that these trusts can help shield assets from lawsuits or creditors. Sexy? Not so much. Surprised? Don't be.

Contrary to the popular vision of "offshore" banking, the true purpose of these accounts for many wealthy clients is to protect a lifetime of earnings and savings not from being taxed, but from being wiped out in a major lawsuit -- say, a medical malpractice or a class-action securities litigation against an executive. "Litigation is a much bigger threat than taxes because there is an unlimited amount of assets at risk," says California lawyer Jeffrey Verdon. "High-net-worth people are at bigger risk than normal people."

There are other strategic reasons. Offshore companies in the British Virgin Islands, for example, can be used to house estate assets that can be passed to family members without estate taxes. And offshore accounts can open doors to new investment opportunities. Offshore investment funds not registered with the U.S. Securities and Exchange Commission often require U.S.-based investors to set up an offshore entity to participate.

Of course there is the, ahem, possibility that the accounts are being used to avoid paying excessive taxes, even though U.S. taxpayers who have offshore accounts are required to file annual forms to the U.S. IRS detailing transfers and other trust activities -- or face a penalty of 5% of the value of the assets. They are also supposed to file forms detailing distributions from their trust (or face a penalty of 35%).

Some countries do not necessarily enforce the reporting requirements, and some, like Luxembourg, say it is up to the trust owner to keep up with the paperwork. This perpetuates the notion that offshore accounts are being used to scam the government. "Offshore holdings continue to be viewed with skepticism and a presumption of impropriety by the IRS," writes Jeffrey Morse, a Las Vegas lawyer, in the March issue of Nevada Lawyer magazine.

Perhaps for that reason, "offshoring" has acquired a bad name. There has been a push internationally to rein in what countries can offer foreigners looking to park assets. Earlier this year, German tax authorities raided Lichtenstein, and the scandal involved spies hired by the German government to investigate what German citizens were doing with their money there.

Maybe that is why there is a movement to put assets in U.S. accounts. U.S. trusts are less costly to set up and have less paperwork hassle than some offshore locations. They are available in Alaska, Delaware, Nevada, Oklahoma, South Dakota, Rhode Island and Utah.

Still, there is reason to pause before diving in. For starters, there is not enough case law in the U.S. to judge whether the onshore trust will shield assets for those who do not actually live in the state where they were formed. For another, there is a reason why other states have not climbed on board. As a basic public policy, it makes little sense to encourage individuals to hide or keep out of reach assets from their creditors or others, such as angry ex-spouses.

Why would anyone with serious wealth to protect want to be a test case for an evolving body of law? And in a shaky economically declining country that is starved for capital? For those who have been successfully brainwashed against the whole idea of going offshore but still want to protect their assets, we can see the attraction of some of these U.S. structures. For everyone else there are better alternatives.

And U.S. trusts do not necessarily make it impossible for creditors to go after assets. Where a creditor might be deterred by the expense and hassle of pursuing assets held offshore, that is not necessarily the case at home.

In Nevada, for example, the law expressly forbids the funding of a trust to hinder, delay or defraud known creditors. If a creditor had a claim on the assets before they were transferred into the trust, the creditor has up to 2 1/2 years to get a judgment in its favor. If the creditor's claim comes after the transfer of assets, it is out of luck after two years.

Of course, that is the case of offshore trusts, too, especially where a spouse is involved. In a recent New York court case, part of a husband's assets were offshore in trust in the Cook Islands -- but only part, about half. A judge ruled in the divorce that the husband could keep his assets in the Cook Islands, but he had to fork over the rest to his wife.

"Too many people try to play games with them," says Chris Riser, a lawyer at Riser Adkisson LLP. "Make them something they are not." Caveat emptor.

The article has some interesting sidebars as well: "World's Top Tax Havens", "Top Pirate Capital Destinations", and "Where the World's Wealth is Stored", among others.

DUBAI: THE WORLD’S NEXT GREAT ARBITRATION CENTER

This article covers an aspect of Dubai's efforts to become a major financial center in the Middle East that is easy to overlook amidst the excitement of the highly visible external changes in the country. Namely, when the wheeler-dealers have a dispute, they need a consistent and trustworthy mechanism for resolving it. And thus the at least symbolic significance of an agreement between the Dubai International Financial Center and the London Court of International Arbitration.

Not long ago, a photo shoot was held at the Gate Building in the Dubai International Financial Center (DIFC) involving high-ranking Arabs, looking relaxed in their flowing ceremonial robes, and a group of pin-striped, buttoned-up Britons. Such events are becoming increasingly frequent in Dubai. At the front of the group were the DIFC's governor, Omar bin Sulaiman, and Jan Paulsson, president of the London Court of International Arbitration (LCIA). As the cameras flashed the two men clinched a deal to form a new regional arbitration center.

As the centrepiece of the DIFC, the Gate complex is reminiscent of London's Canary Wharf 20 years ago. Unfinished and apparently sparsely populated, it has an air of expectation. Only 3 1/2 years old, it forms the heart of efforts to turn Dubai into a regional economic hub. The tax-free zone aims eventually to house 10,000 workers in the banking, capital markets, asset and fund management sectors, in addition to the Dubai International Financial Exchange. So far 600 institutions are registered there.

But when the deal makers fall out, they need a consistent and trustworthy mechanism for resolving disputes. Hence all the fuss over the tie-up between the DIFC and LCIA. ...

The deal is a milestone for both parties: For the London Court, it marks the first time it has ventured beyond the UK. For the DIFC, it means access to an international network of arbitrators that will allow it to appoint high-caliber tribunals, a facility that has arguably been lacking in the region before now. Crucial to the DIFC's attractiveness as a business center is that it will be governed by English common law rather than the civil code that applies elsewhere in the Gulf.

The rising cost of conventional, court-based litigation has meant alternative dispute resolution has become increasingly popular over the past two decades. London, New York and Paris are already entrenched as the leading venues, with Singapore making the running in the Far East. Can Dubai realistically expect to compete with the more established global centers?

Convinced that it can, foreign law firms and barristers have descended upon the emirate in the past few years. Patrick Bourke, a partner in the Dubai office of Norton Rose, the London-based law firm, says: "There is a need for a regional center. At the moment you are either heading back towards Europe or towards Singapore or Hong Kong."

Alec Emmerson, a partner at Clyde & Co, expects there will be a lot of disputes arising from the apparently ceaseless property and construction boom. But it will not stop there. He also predicts disputes arising from investments, shipping, telecom and other consultancy and management contracts.

Some lawyers believe Dubai could even start to take work away from London. Peter Flint, the head of international arbitration at Barlow Lyde & Gilbert, says: "A substantial amount of work is migrating away from London to venues that are more convenient. For parties based in Central Asia, the Middle East and North Africa, the Gulf is an obvious destination."

But Dubai faces competition not only from London, New York and Paris, but from within the Gulf itself. Nipping at its heels are the Abu Dhabi Commercial Conciliation and Arbitration Centre, established in 1993, and the Qatar Centre for Reconciliation and the Qatar Financial Center. Flint says: "Certainly Dubai is ahead of the game in terms of infrastructure, but its neighbors may well challenge that position in time."

At the end of March, Khawar Qureshi, QC, one of the top arbitration silks in the UK, announced the launch of McNair Chambers in the Middle East. He opted not for the glitz of Dubai but for the relative obscurity of Doha, the capital of Qatar. William Frain-Bell, of Terra Firma Chambers, the Edinburgh set, makes a case for Abu Dhabi, the capital of the United Arab Emirates, 90 miles to the south of Dubai.

Frain-Bell says Dubai is too popular and crowded to be a practical and convenient arbitration centre. "There are plenty of hotels and facilities," he says, "but getting into a hotel at short notice for a reasonable price can be difficult, especially if your arbitration coincides with a major conference."

Abu Dhabi, on the other hand, has excellent infrastructure and the advantage of being the home of leading organisations, such as the UAE Central Bank, that are likely to generate a rich seam of regulatory work.

Regardless of which center emerges as dominant, there is a consensus that the Middle East needs a world-class arbitration facility if it is to attract the sort of international business it covets. Bourke says: "Given the historic difficulties in enforcing foreign judgments and awards in Middle East jurisdictions, the moves to position Dubai as a regional center of excellence for arbitration are welcome."

HERE COMES THE NEXT MORTGAGE CRISIS

Subprime was just the beginning. Wait until California’s prime borrowers start handing their keys to the bank.

The idea of U.S. real estate prices declining has gone from unthinkable to possible to plausible to accepted. Now it is time to think about the possibility that the decline may snowball to a 20% or greater fall from the peak. This has already happened in parts of California. In that event, even those house buyers (one hesitates to call them owners) who put down more traditional sized down payments lose all their equity. Moreover, many who bought well before the peak subsequently worked down their home equity percentage by taking out additional loans collateralized by their homes -- often while "refinancing" their house, which meant exchanging a lower interest rate mortgage for the old one and, incidentally, adding more principal to the outstanding mortgage.

"California should be the poster child for a mortgage-loan bailout. In few other places have so many taken on such onerous debts with so little equity," writes Mark Gimein in Slate. He is referring to many prime borrowers as well as the now notorious subprime. And Gimein is looking at 40 to 60% price declines.

All of which brings out the question: What happens when people's home equity goes significantly negative and making the monthly housing payments becomes a struggle? Like most economic decisions, people will consider the tradeoff between continuing to pay (effectively as renters) and defaulting. One consequence of going the later route is the alleged shame of it. But even if the defaulter is inclined towards that way of thinking, the presence of a lot of company will substantially or totally mitigate that tendency. Another consequence would be the credit rating damage. It that case, the tradeoff is between saving a lot of cash flow drainage now versus diminished access to credit in the future (for a while, anyway).

We think the outcome is all but inevitable. As does Gimein: "Whatever moral qualms are being urged on borrowers to keep them from walking away from their mortgages, they will count for a lot less than the economic reality facing borrowers whose homes have fallen in value by half." And on the credit rating hit: "[I]t is perfectly possible that buying a new home a year [after a default] will in the near future be as routine and unsurprising as the once inconceivable idea that you can get a whole batch of new credit cards two years after a bankruptcy."

On the later point, we can look not just at history but at the very nature of our debt-based money and credit creation process. Assuming the system survives intact -- and we are not sure that it will -- loans will have to made somewhere, to someone who is willing to take them on. And most buyers would probably be OK with financing a house at 40% to 60% lower prices versus a few years back.

California is to mortgage lending what Chicago is to pork bellies. For years, that meant it was a place with soaring house values; today, the foreclosure rate across the state is twice the national average and going up fast. Riverside County, outside Los Angeles, may be the foreclosure capital of the country, with a rate close to six times the national average. And housing prices are in freefall.

California should be the poster child for a mortgage-loan bailout. In few other places have so many taken on such onerous debts with so little equity. Unfortunately, the crisis in California is going to get much worse, and there is no bailout that will solve it. Why? Because if the first stage of the foreclosure crisis was about people who could not afford their mortgages, the next stage will be about people who have every reason not even to try to pay their mortgages.

Over the next several months, we are going to be subjected to a chorus of hand-wringing about the moral turpitude of people who walk away from their mortgages and pronouncements like last month's warning from Treasury Secretary Henry Paulson that people should honor their mortgage obligations. The problem with finger-wagging on what you "should" or "ought" to do is that, when it comes to money, you are usually given the lecture only when it is in your interest to do the opposite. Certainly, that is the case for all the California homeowners who in the next year or two are going to find themselves with the choice of whether, faced with a huge new wave of interest resets and a historic decline in the value of their homes, they will simply walk away.

First, those home prices ... Last month, the California Realtors' association (folks who in October managed to "project" that prices would fall 4% in 2008) reported that, actually, California house prices in February fell 26% from a year ago. In the places where the foreclosure boom has hit hardest, it is worse. A quick, almost random survey of some foreclosure prices in Southern and Central California:

• In San Bernardino, a house bought for $310,000 in 2005 is now being offered by the bank for $199,900.
• A 2,000-square-foot ranch house in Rancho Santa Margarita is down from $775,000 to $565,000.
• A starter home in Sacramento, sold for $215,000 in 2004, is now down to $129,900.

These are not sale prices. They are asking prices. Do not doubt that they are negotiable.

Unfortunately, when it comes to the California crash, these striking numbers are not the end. They are the beginning. (To give Paulson his due, he said that, too.) Which brings us to the other scary part of the California story: a coming wave of interest-rate resets in prime loans given to people with good credit that are just as bad, or worse, than we have seen in subprime.

The most common subprime loans were known as "2/28" in the industry: 30 years, including a 2-year teaser rate before the interest rate rose. Now these loans have reset, and we are seeing the fallout.

But prime borrowers, too, got loans that started out with low payments. If you bought or refinanced your house in the last few years, it is not unlikely that you have one. With an "option ARM" loan you have the "option" (which most borrowers happily take) of paying less than the interest -- the magic of "negative amortization." The loan grows until you hit a specified point -- the exact point varies with the lender ... when the payment resets to close to twice where it was on Day 1. ... The really amazing thing is that the meltdown in California is already happening and virtually none of these loans have yet reset.

Option ARM loans were heavily marketed to upper-tier home buyers in California. It is hard to know how bad the option ARM crisis will be before it actually happens, but Moe Bedard, an advocate in Southern California who advises homeowners on foreclosure and blogs about the crisis at Loansafe.org says that the difference in the time until the rate rises is the main reason that upper-middle-class Orange County (now facing foreclosures at a rate merely twice the national average) has not yet been hit as badly as places like Riverside.

When those dominoes start falling next year, we may or may not have a subprime bailout plan, and the discussion will start about how to bail out this next tranche of borrowers. The bailout plans on the table now, such as the one put forward by Barney Frank (one of Congress's genuinely cogent financial minds), are reasonably based on the principle of bringing payments down to a point that homeowners can afford

But where prices fall 40% to 60%, all that goes out the window. Why? Because in expensive locales like San Diego, tens of thousands of people with 100% loan-to-value mortgages and option ARMs are living in homes in which they have no equity and on which they owe a lot more than the house is worth.

In these places, accepting a government "bailout" that pays them, say, 90% of the value of the house to keep from foreclosing will be very tough for lenders, who (if the appraisers do not fudge the numbers) could be forced to take 36 cents or 45 cents on the dollar for their loans. On the other hand, any plan that makes them pay more if they can afford it is hugely disadvantageous for the borrowers, who have option ARMs about to reset and are much better off handing the keys to bank -- and maybe even scooping up the foreclosed house down the street.

If you are one of the "homedebtors" (a fantastic neologism coined by the anonymous blogger IrvineRenter on the Irvine Housing Blog) in this position, you might start thinking very seriously about just how attached you are to the wisteria vine snaking over the basketball hoop on your garage. That is what a lot of other California borrowers will be doing.

The luckiest of those are the ones who used option ARMs to buy a house. For them, walking away is easy: Their loans are "nonrecourse", and the lenders cannot go after them for more than the value of the house. The choice is harder for those who used the loans to refinance. The quirks of real-estate law regarding refi loans make it possible (though not necessarily easy) for lenders to try to get back more money even after taking the house.

If you think, however, that should make lenders a lot happier, forget it. LoanSafe's Bedard says that even in this group, most of the option ARM borrowers he talks to -- some of them living in $800,000 houses -- are already considering walking away from their deeply depreciated homes as soon as the rates reset.

Bet on this: Whatever moral qualms are being urged on borrowers to keep them from walking away from their mortgages, they will count for a lot less than the economic reality facing borrowers whose homes have fallen in value by half. Lenders had no reservations about selling borrowers loans with rising payments that would be poisonous in a rising market. Now it seems borrowers have no reservations about leaving those lenders with the risks they begged to take.

Consider, too, that, yes, going through a foreclosure kills your credit rating and makes it a lot harder to buy a new house -- but as more and more prime borrowers go into foreclosure, it is perfectly possible that buying a new home a year later will in the near future be as routine and unsurprising as the once inconceivable idea that you can get a whole batch of new credit cards two years after a bankruptcy.

Of course, all those people stuck between rising mortgages and falling prices are free to follow Paulson's advice: Keep making payments on an outsized mortgage, and take a bullet for the greater economic good. Fortunately for them, and perhaps unfortunately for the economy, a lot of them will come to the realization that they just do not have to.

The next interesting question concerns international real estate prices. The bubble may have originated in the U.S., but make no mistake, it was worldwide in the end. The collapsing dollar may disguise what is happening outside the U.S. to a degree, so local currency prices would be the more useful yardstick.

IRS LARGE BUSINESS AUDITS FALL TO ALL-TIME LOW

The Transactional Records Access Clearinghouse (TRAC) at Syracuse University sporadically issues a report on the effectiveness of the IRS's auditing efforts. Their latest report indicates that the IRS's audit rate for the largest U.S. companies has fallen even as the overall company audit rate has risen. This isolated fact is not surprising. For a given number of audit hours and a consistent rate of data sampling, obviously a lot more small company audits can be performed than large company. The interesting factoid from the study is that going by the logical metric of additional recommended taxes per additional revenue agent hour spent auditing, the IRS gets a far greater return on its efforts going after the big boys.

We can think of several reasons why the IRS has nevertheless decreased its audit rate of the big companies: (1) Realized additional tax dollars per additional recommended tax dollar is far lower for big companies than small ones. (2) Auditing large companies is difficult and complex, and the IRS field agents are getting worn down from dealing with all that complexity. They are moving on to easier if less renumerative targets. (3) The big companies have appealed to their Congressional water carriers to get the IRS heat off them, which then gets transferred to those less politically connected. Your guess is as good as ours.

The audit rate for the largest corporations in the United States in 2007 plunged to its lowest level in the last 20 years, less than half what it was in FY 1988, according to IRS data analyzed by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University. The TRAC study found that a historic collapse in audits for corporations with $250 million or more in assets has been especially notable during the last two years, when the rate dropped from 43% in FY 2005, to 34% in FY 2006, and then to an all-time low of 26% in FY 2007.

It also concluded that less time is being spent by IRS auditors on large corporate audits. Over the last five years, the length of these audits has decreased by 20%. Accordingly, there has been a 20% fall in the amount of recommended additional tax that should be paid as a result of audits from 2005 to 2007 to just over $24 million -- a figure [presumably an average] which still accounted for 54% of the total additional taxes that auditors said should have been paid in 2007.

However, TRAC observed that the decline in the number of large corporate audits has occurred simultaneously with claims by the IRS that the overall audit rate has increased, suggesting that the agency has changed its strategy to focus on smaller corporations, which take less time to audit, and therefore boost its overall audit completion figures.

This seems to have been borne out by the data analyzed by TRAC, which noted that while the FY 2005 to FY 2007 audit rates for the smaller corporations were climbing -- particularly for those with $50 million or less in assets -- the rates for the corporations with assets of $50 million or more were falling.

In recent years, the audit burden appears to have been falling particularly heavily on the smallest class of business overseen by the IRS Large and Mid-sized Business Division (LMSB). The audit rate of these companies, which have assets of between $10 million and $50 million, increased to 14.7% in 2007, significantly higher than either the 10.9% or 11.5% audit rates for larger firms in each of the next two higher asset brackets ($50 million to $100 million, and $100 million to $250 million).

However, because small company audits tend to produce less in extra revenues than larger companies, there was a major cost involved in the IRS's effort to drive the overall corporate audit rate higher, TRAC found. For example, in FY 2007, for each revenue agent hour spent auditing the smallest corporations, the government uncovered $682 in additional recommended taxes. For mid-size corporations whose audit rates increased so fast that they surpassed the rates for the larger corporations, each hour of revenue agent's time resulted in even less money, only $474 in recommended additional taxes. At the other extreme, however, for every hour that the IRS devoted to auditing the corporations with more than $250 million in assets, the revenue agents recommended $7,498 in additional taxes.

"Moving the focus of the corporate auditors away from the large corporations and towards the smaller ones has been quite effective when it came to increasing the overall number of these kinds of audits," the TRAC researchers observed, "but actually was counter productive in financial terms." The IRS did not respond to queries from TRAC about key aspects of its report.

U.S. LAWMAKER WANTS TO “TERMINATE” TAX CODE

Proposals to radically simplify the U.S. tax code surface frequently. Some have a fair number of Representatives or Senators behind them. However wise the ideas may be, they run into the problem that they infringe on the capacity of members of Congress to dispense favors to their favored interests.

As U.S. taxpayers struggled to beat the 15th April tax filing deadline, U.S. Representative Bob Goodlatte took the opportunity to raise awareness of his initiative to radically simplify the U.S. tax code. Goodlatte's Tax Code Termination Act, introduced at the start of the 110th Congress, would repeal the entire tax code, except portions that deal with Social Security and Medicare by December 31, 2010, and calls on Congress to approve a new Federal tax system by July of the same year.

"I think we can all agree that the current tax system has spiraled out of control,” Goodlatte stated on the eve of the tax filing deadline. "With American taxpayers and businesses devoting a total of 6.6 billion hours each year to comply with the current tax code, we need tax simplification."

Goodlatte pointed to the 2006 Annual Report to Congress by the National Taxpayer Advocate -- an independent organization within the IRS which assists taxpayers who are experiencing problems with the IRS -- which listed "the complexity of the Internal Revenue Code" as the most serious problem facing American taxpayers.

Goodlatte's legislation has already been passed twice by the House of Representatives, first in 1998 by a vote of 219-209, and then in 2000 by a vote of 229-187. In the current Congress, the Virginian Republican has been joined by nearly 100 members, both Republicans and Democrats, who have cosponsored his legislation.

While such a radical measure is unlikely to actually become law, Goodlatte argues that the legislation takes an important first step along the road to tax reform by forcing Congress to at least consider the issue. There are a number of possibilities to replace the current tax code, Goodlatte believes, such as the so-called "fair tax", or a flat income tax.

"Today's tax code is unfair, discourages savings and investment, and is impossibly complex," continued Goodlatte. "The Tax Code Termination Act will force Congress to finally debate and address fundamental tax reform. Whichever simpler and fairer tax system is adopted, the key ingredients should be: a low rate for all Americans; tax relief for working people; protection of the rights of taxpayers and reduction in tax collection abuses; promotion of savings and investment; and encouragement of economic growth and job creation."

The Tax Code Termination Act has been referred to the House Committee on Ways and Means for further consideration.

Recall that according to Sir Barnett Cocks (1907-1989): "A committee is a cul-de-sac down which ideas are lured and then quietly strangled."

U.S. FINANCIAL COLLAPSE WILL END THE BUSH AND CHENEY IRAQ WAR

The U.S. is just one of many militias vying for power in a state that is ruled by warlords, writes Mike Whitney -- a pithily apt description that could not more effectively summarize the Iraq quagmire. So the situation is a no-win militarily. Add to that, it is bankrupting the U.S. government financially. Yet the folly persists.

The U.S. Military has won every battle it has fought in Iraq, but it has lost the war. Wars are won politically, not militarily. Bush does not understand this. He still clings to the belief that a political settlement can be imposed through force. But he is mistaken. The use of overwhelming force has only spread the violence and added to the political instability. Now Iraq is ungovernable. Was that the objective? Miles of concrete blast-walls snake through Baghdad to separate the warring parties. The country is fragmented into a hundred smaller pieces each ruled by local militia commanders. These are the signs of failure not success. That is why the American people no longer support the occupation. They are just being practical; they know Bush's plan will not work. As Nir Rosen says, "Iraq has become Somalia."

The administration still supports Iraqi President Nouri al Maliki, but al-Maliki is a meaningless figurehead who will have no effect on the country's future. He has no popular base of support and controls nothing beyond the walls of the Green Zone. The al-Maliki government is merely an Arab facade designed to convince the American people that political progress is being made, but there is no progress. It is a sham. The future is in the hands of the men with guns. They are the ones who have divided Iraq into locally-controlled fiefdoms and they are the ones who will ultimately decide who will rule the state.

At present, the fighting between the factions is being described as "sectarian warfare," but the term is intentionally misleading. The fighting is political in nature. The various militias are competing with each other to see who will fill the vacuum left by the removal of Saddam. It is a power struggle. The media likes to portray the conflict as a clash between half-crazed Arabs -- "dead-enders and terrorists" -- who relish the idea killing their countrymen, but that is just a way of demonizing the enemy. In truth, the violence is entirely rational. It is the inevitable reaction to the dissolution of the state and the occupation by foreign troops. Many military experts predicted that there would be outbreaks of fighting after the initial invasion, but their warnings were shrugged off by clueless politicians and the cheerleading media. Now the violence has flared up again in Basra and Baghdad, and there is no end in sight. Only one thing seems certain, Iraq's future will not be decided at the ballot box. Bush has made sure of that.

The U.S. military does not rule Iraq nor does it have the power to control events on the ground. It is just one of many militias vying for power in a state that is ruled by warlords. After the army conducts combat operations, it is forced to retreat to its camps and bases. This point needs to be emphasized in order to understand that there is no real future for the occupation. The U.S. simply does not have the manpower to hold territory or to establish security. In fact, the presence of American troops incites violence because they are seen as forces of occupation, not liberators. Surveys show that the vast majority of the Iraqi people want U.S. troops to leave. The military has destroyed too much of the country and slaughtered too many people to expect that these attitudes will change anytime soon. ... The hearts and minds campaign is lost. The U.S. will never be welcome in Iraq.

According to a survey in the British Medical Journal Lancet more than one million Iraqis have been killed in the war. Another four million have been either internally displaced or have fled the country. But the figures tell us nothing about the magnitude of the disaster that Bush has caused by attacking Iraq. The invasion is the greatest human catastrophe in the Middle East since the Nakba in 1948 [the Palestinian refugee flight during the end of the British Palestine Mandate and the first Arab-Israeli War. Nakba translates to "disaster" or "cataclysm"]. Living standards have declined precipitously in every area -- infant mortality, clean water, food, security, medical supplies, education, electrical power, employment etc. Even oil production is still below pre-war levels. The invasion is the most comprehensive policy failure since Vietnam; everything has gone wrong. The heart of the Arab world has descended into chaos. The suffering is incalculable.

The main problem is the occupation. It is the primary catalyst for violence and an obstacle to political settlement. As long as the occupation persists, so will the fighting. The claims that the so-called surge has changed the political landscape are greatly exaggerated. Retired Lt. General William Odom commented on this point in an interview on the Jim Lehrer News Hour: "The surge has sustained military instability and achieved nothing in political consolidation. ... Things are much worse now. And I don't see them getting any better." ...

The war in Iraq was lost before the first shot was fired. The conflict never had the support of the American people and Iraq never posed a threat to U.S. national security. The whole pretext for the war was based on lies. It was a coup orchestrated by elites and the media to carry out a far-right agenda. Now the mission has failed, but no one wants to admit their mistakes by withdrawing; so the butchery continues without pause.

How will it end?

The Bush administration has decided to pursue a strategy that is unprecedented in U.S. history. It has decided to continue to prosecute a war that has already been lost morally, strategically, and militarily. But fighting a losing war has its costs. America is much weaker now than it was when Bush first took office in 2000 -- politically, economically and militarily. U.S. power and prestige around the world will continue to deteriorate until the troops are withdrawn from Iraq. But that is unlikely to happen until all other options have been exhausted. Deteriorating economic conditions in the financial markets are putting enormous downward pressure on the dollar. The corporate bond and equities markets are in disarray. The banking system is collapsing, consumer spending is down, tax revenues are falling, and the country is headed into a painful and protracted recession. The U.S. will leave Iraq sooner than many pundits believe, but it will not be at a time of our choosing. Rather, the conflict will end when the United States no longer has the capacity to wage war. That time is not far off.

In one of Barbara Tuchman's many classic books on history, The March of Folly from Troy to Vietnam, she quoted William Pitt (Lord Chatham) on England's war against American independence: The nation has been betrayed into it "by the arts of imposition, by its own credulity, through the means of false hope, false pride and promised advantages of the most romantic and improbable nature."

And John Adams, on England: "The pride and vanity of that nation is a disease; it is a delirium; it has been flattered and inflamed so long by themselves and others that it perverts everything."

Ms. Tuchman herself saw the persistance of the "folly" in her book title as due to, among other causes, "The terrible encumbrance of dignity and honor; of putting false value on these and mistaking them for self-interest; of sacrificing the possible to principle when the principle represents a right you know you cannot exert."

George Santayana famously averred that "Those who cannot remember the past are doomed to repeat it." To which some apparently anonymous wag has added: "Every time history repeats itself the price goes up." After the British withdrew from their attempt to occupy the soon-to-be United States of America, trade flourished with the ex-colonies -- with some interruptions, e.g., in 1812-14 -- and the British Empire went on to greater glory (of a sort), before succumbing to socialism and further bouts of ill-advised militarism. Unfortunately, the post-Iraq fate of the United States appears less promising. The Iraq misadventure looks to be more analogous to Britain's participation in World War I than its war against American independence.

W.I.L. commenced business a couple of years before the 2003 Iraq invasion, and we have warning from the start that the U.S. government was destined for de facto bankruptcy. (Formal bankruptcy can be avoided by printing dollars in order to pay off the dollar-denominated debts. This still represents paying off debt holders at less than face value when measured in inflation-adjusted dollars.) The Iraq invasion certainly accelerates that outcome -- when you spend $1 trillion to create negative value, that conclusion is unavoidable. The consequences of the bankruptcy will reach into everyone's life and wallet. Be prepared.

SPITZERESQUE PITCh

Steve Forbes, editor of Forbes magazine and one-time Republican presidential candidate, is rather too enamored of military adventurism and certain aspects of centralized government for our taste. Be that as it may, he is a consistent no-nonsense supporter of those elements that encourage entrepreneurship and economic growth: sound money and the rule of law. His commentary on the recent baseball steroids circus is particularly clear-headed. (Scroll down to the bottom-most subheading in the linked-to page.)

The U.S. Justice department is targeting Roger Clemens for criminal investigation for allegedly lying before a congressional committee in February. When will this ghastly farce end? It is no coincidence that two players [Clemens and all-time homerun king Barry Bonds] who could face jail time in the steroids scandal are among the game's most disliked figures. They are not being pursued because they used steroids; prosecutors hope to nail both of these men on perjury charges

s The rule of law is being distorted like a pretzel here. Other, less unpopular players either were not questioned or were given a pass. If Congress was serious about the use of performance-enhancing drugs, it would have questioned every player, trainer, owner and top baseball union official. Baseball Commissioner Bud Selig would have been asked -- under oath -- what he knew and when, as well as what rumors he had heard.

Unequal enforcement of and protection under the law? We are shocked, repeat SHOCKED!

Major League Baseball did not even get around to testing players until four years ago. The steroid controversy is riddled with hypocrisy. After the disastrous 1994-95 baseball strike Major League Baseball collectively averted its eyes from the players' growing drug use because bulked-up bodies meant more home runs. Selig made no real effort to ban powerful performance enhancers, and union leaders vigorously resisted any kind of testing.

Two years ago, to mollify critics, Selig contracted former Senator George Mitchell to conduct an investigation. Mitchell is a director of the Boston Red Sox, so it came as no surprise that his report named twice as many Yankees as Red Sox players. His list of suspected players was acknowledged to be woefully incomplete. Moreover, Mitchell refused to release the supporting documents.

Selig had already sullied his own reputation. When he initially became baseball commissioner he retained his financial interest in the Milwaukee Brewers. Allegedly to enhance the team's value he had it transferred from the American League to what he felt was the more lucrative National League. That is why the National League has 16 teams and the American League 14. Not content with that bit of self-dealing, Selig then tried to force the Minnesota Twins out of business, knowing the Twins competed with the Brewers for fans in that part of the country.

Selig missed his calling in politics. Then again ...

The entire steroids affair is an ethical and moral disgrace. Baseball should appoint a new commissioner and the players union a new leader. Testing for banned substances -- which should include blood samples, not just urine samples -- should be more frequent and truly unannounced. And investigations of past usage and prosecutions connected with them should cease.

The affair is also emblematic of prosecutorial excesses, of too quickly seeking to appease an anxious, angry crowd's cry for blood when things are going wrong or people feel the world is spinning out of control. From Eliot Spitzer's grossly abusing his public powers (behavior sadly imitated by numerous other state and local officials), to the Justice Department's trying to make it impossible for accused executives to get proper defense counseling, to Congress's grandstanding with demagogic hearings to inflame and win favor with the public, the rule of law and that essential sense of proportion are being shredded.

This last set of points is the most important, vis-a-vis the deterioration in the objective rule of law. Forbes also astutely notes that hearings' role in keeping the herd entertained, and diverted from fundamental issues, when it is feeling angry or insecure.

INSTALL UBUNTU LINUX FROM WITHIN WINDOWS

Kissing Windows goodbye and moving to Linux all at once is a bigger leap than most are prepared to make, beginner-friendly though the newbie-orineted Linux distributions have become. A reasonable transition process is to set up one's PC to boot both Linux and Windows, and boot into Linux and learn to use it when one has the time and inclination. This generally would involve partitioning one's hard disk and setting up the boot manager. Now even this intermediate step can be sidestepped, as a program which installs popular Linux distribution Ubuntu from within Windows is now available. It is hard to conceive of how the transition can be made much easier than that.

You can install and run Ubuntu from within Windows without any risk of accidentally deleting your existing programs and files by using Wubi, an unofficial Ubuntu installer for Windows users. Unlike UNetbootin, which installs Linux on a hard disk partition, Wubi works by installing Ubuntu within a file stored on your Windows drive, and adding itself to the Windows boot.ini file to allow you to choose between Windows and Linux at boot time.

Wubi is based on Ubuntu 8.04 Long Term Support (LTS), which will be released this April. Both Wubi and Ubuntu 8.04 are available now in stable beta versions. You can install Wubi by downloading Ubuntu 8.04, burning it to a CD-ROM, and running the installer included on disc, or you can download the 10MB Wubi installer and run it. That approach may be a little slower, as Wubi has to download the installation files it needs over the Internet, rather than from a local CD image.

Wubi requires a system with a processor of at least 1GHz, at least 256MB of RAM, Windows 98 or newer (although Windows 2000 and above is recommended), and a minimum of 4GB of free disk space. ... You install and remove Wubi the same way you work with any other Windows application, which is great if you are new to Linux and are not yet comfortable with partitioning or dual booting. I downloaded the latest Ubuntu beta ISO image, burned it to a blank CD, and inserted it into my laptop. The Windows autorun program appeared, and displays options for Demo and full installation, Install inside Windows, and Learn More. I chose the option to install Ubuntu within Windows. The installer gave me an option to change the installation drive and set the amount of space to reserve for Ubuntu. It prompted for which language to use, and what username I wanted to log in as. I kept all of the default options as they were. I only needed to set my password and click Install before I was ready to go.

Installation took only about 10 minutes. When I rebooted my machine, an option to boot Ubuntu was added to my Windows boot list, and after selecting it, Ubuntu started loading just as it would if installed on a dedicated drive. I was even given the normal GRUB menu.

After the operating system finished loading, it started another install process within Ubuntu, which took an additional five minutes or so. The second installation ran through partitioning and installing packages. Once the second install routine was complete, my machine rebooted a second time, and I finally saw the Ubuntu login screen.

My new Ubuntu install allowed me to do everything I can do in a dedicated install, such as download and install applications and updates, browse the Internet, check email, play music, and configure my themes. Ubuntu's flashy desktop effects also worked as expected.

The performance of Wubi was equal to that of a dedicated Ubuntu install, with the exception of slightly slower hard-drive seek times. If your Windows host drive is heavily fragmented, you can expect an even greater slowdown. On my machine the difference was barely noticeable, as I always keep my Windows drive as defragmented as I can. glxgears showed that I have the same level of hardware acceleration as I would if I had a dedicated install; yet when I tested 3-D games such as PlanetPenguin Racer and Neverball, some of the textures were corrupted.

The only downside I could find was that I was unable to access files stored on my Windows drive from Ubuntu; it appeared not to be mounted under Wubi. ... The ability to view files stored on the Windows drive would have been nice, and it would have been nicer if Wubi integrated my home folder in Ubuntu with the My Documents folder in Windows.

We have always followed the practice of creating multiple partitions and putting the Windows OS on one, programs on a 2nd, documents on a 3rd, music on a 4th, and so on. This is admittedly overkill, but using separate partitions for the operating system and what one might usefully classify as data seems like a reaonable practice. It makes backing up simpler, and now we see that on a machine that boots into multiple operating systems it simplifies data access issues.

Once you are comfortable with your new Ubuntu installation, you can transfer it to a dedicated drive or even overwrite Windows by using Loopmounted Virtual Partition Manager. ... LVPM requires that you already have a spare partition to install to. If you do not, you will need to create one.

Overall, Wubi provides an alternative for those who would like to try Ubuntu without the slow performance of a live CD or the responsibility of partitioning a hard drive. Wubi includes most features of a typical Ubuntu install, is painless to set up, and can later be transferred to a dedicated drive without any loss of installed applications, settings, or files.

OBEDIENCE AS A RADICAL ACT

Butler Shaffer, periodic contributor to LewRockwell.com and author of Calculated Chaos: Institutional Threats to Peace and Human Survival, invariably has an interesting perspective on matters. Here, he proposes an unconventional avenue of resistance to government meddling and absurdity: exact obedience, including and up to the point that the rule being challenged falls under its own weight. One might call it "radical obedience", putting into practice a disproof by reductio ad absurdum of the proposition that a rules-based system can function as an effective method of governance.

Unions have been known to use the tactic of precisely following all company rules to the letter as a negotiating method. In practice, that ammounts to a work slowdown which would otherwise violate the union/management agreement in place if the slowdown were explicitly implemented in the usual manner. Rules cannot possibly accommodate the nuances of life in the real world, and just get in the way once they begin to proliferate out of control. Unless the rules are "broken", business and activity will grind to a halt. Shaffer proposes a similar tactic with regard to government rules.

A recent news story told of cities that are removing their cameras that photograph cars running red lights at certain intersections. The reason? Drivers are aware of such devices and, rather than run the risk of getting a ticket in the mail, they stop in time. One would think making intersections safer might be a cause for self-congratulatory celebration at city hall. Not so. By reducing red-light violations, cities have also reduced the revenues coming from the traffic tickets.

This is hearsay evidence on our part, and incidental to the thrust of the article, but we recall reading somewhere that such cameras can make intersections less safe. People stop suddenly to avoid getting ticketed, thereby resulting in more rear-enders.

This report reminded me of another phenomenon of local policing: the use of parking meters. On first impression, one might conclude that city governments would want car owners to keep meters filled with the necessary coinage for the duration of their stay. Quite the contrary. City officials count upon time expirations on meters so that motorists can be given tickets by the battalions of meter-maids who prowl the streets in search of prey. An additional dime or quarter in a meter pales in monetary significance to a $25 parking violation. This is why most cities have made it a misdemeanor for a person to put coins in a meter for cars other than their own.

A former student of mine once made an inquiry into the revenues cities derived from parking violations. Without such monies, he concluded, most cities could not sustain their existing municipal programs. This leads to an obvious conclusion: If you would like to reduce the scope of local governmental power, keep your parking meters filled!

Decades ago, I read a most important book: Humphrey Neill's classic The Art of Contrary Thinking. While Neill focused largely on the world of market investing, his ideas carry over into almost all fields of human endeavor. The contrariness to which he addressed himself was not simply a reactive antagonism to existing practices or policies, but a challenge to use intelligent, reasoned analysis in considering alternatives. Unlike what passes for thinking in our world, "truth" is not necessarily found either in consensus-based opinion or in middle-ground "balances" of competing views. It is to be found wherever it may reside, even if only one mind is cognizant of it.

I have long found Neill's book a useful metaphor for extending human understanding into realms he did not contemplate. One of these areas relates to the assessment of political systems. Government schools and the mainstream media condition us to take both the purposes and the consequences of governmental decision-making at face value; to believe that the failure of the state to accomplish its professed ends represents only a failure of "leadership" or inadequate factual "intelligence". But what if there are dynamics beneath the surface of events in our world that reflect alternative intentions or outcomes?

More so than in any other area of human behavior, the world of politics is firmly and irretrievably grounded in contradictions and illusions. If you were to ask others to identify the purposes for which governments were created, you would likely get the response: "To protect our lives, liberty, and property from both domestic and foreign threats." This is an article of faith into which most of us are indoctrinated since childhood, and to suggest any other explanation is looked upon as a blasphemous social proposition.

But what, I ask, are among the first things governments do when they get established? Do they not insist upon the power to take your liberty (by regulating what you can/cannot do), and your property (through taxation, eminent domain, and regulations), and your life (by conscripting you into their service, and killing you should you continue to resist their demands)?

The marketplace -- not that corporate-state amalgam that so many confuse with the market -- does not operate well on a bedrock of contradiction. If the manufacturer of the Belchfire-88 automobile starts producing vehicles with defective transmissions, consumers will cease buying this car, despite the millions of dollars spent on glittering advertising. Unless the company is resilient enough to respond to its failures, it will go out of business.

This is an excellent characterization of the fundamental different between voluntary transaction markets and force-based political systems:

While contradictions confuse the information base upon which marketplace transactions are conducted and, thus, impede trade, political systems thrive on them. If the police system fails to curb crime, or the government schools continue to crank out ill-educated children, most of us are disposed to giving such agencies additional monies. The motivations for state officials become quite clear: "The more we fail, the more resources we are given." Contrary to marketplace dynamics, contradictions arise between the stated incentives of government programs (e.g., to reduce crime, to improve the quality of education) and the monetary rewards that flow from the failure to accomplish the declared purposes. Like the intersection cameras now being dismantled, public expectations end up being sacrificed to the mercenary interests of the state.

Perhaps there is a lesson for libertarian-minded persons in all of this. It is both useful and necessary for critics of state power to condemn governmental policies and practices. But there is a downside to just reacting to governmental actions on an issue-by-issue basis. State officials are in a position to control both the substance and the timing of events to which critics will respond. This allows the state to manipulate -- and, thus, control -- its opposition.

While such ad hoc resistance is essential to efforts to restore peace and liberty in the world, it is not sufficient. As we ought to have learned from the Vietnam War experience, opposition to war is not the same thing as the fostering of peace. We will not enjoy a peaceful world just by ending the slaughter in Iraq, if the thinking and the machinery for conducting future wars remains intact. What is needed is a broader base from which to demonstrate to others -- as well as to ourselves -- how the functional and harmful realities of state action contradict the avowed purposes for which such programs were supposedly undertaken.

Drawing from the earlier examples, one such tactic might be -- depending upon the circumstances -- to foster a widespread and persistent obedience to the dictates of state authority. As valuable a tool as the ACLU is in using the courts to attack governmental programs, judicial decisions upholding a right to privacy are not what is bringing down traffic cameras. It is the fact that such devices are inadvertently -- through motorists' obedience to them -- promoting traffic safety (the stated purpose by which they were sold to the public) at the expense of their actual purposes (i.e., to generate more revenue for local governments).

Many cities have ordinances making it a misdemeanor for a homeowner to fail to cut his/her grass before it reaches a stated limit on height. Someone told me of an acquaintance who let his grass grow almost to the maximum height allowed. When one of his neighbors commented on this, the property owner went into his house, brought out a yardstick to measure the grass, then commented that the grass still had two inches to grow before reaching the statutorily-defined limit. He then reportedly asked the neighbor, "You don't want me to violate the ordinance, do you?"

A friend of mine told me of the practice of one of her male friends who was subject to the Selective Service System. One of the mandates of this agency was that those subject to conscription had to keep it advised of any relocations. This young man carried a stack of pre-addressed post-cards, upon which he would write: "I am now at the Rialto Theater at 3rd and Main" and drop it in a mailbox. After leaving the theater, he would send another post-card reading: "I am now at the Bar-B-Q Rib House at 10th and Oak." How much more effective might such a widespread over-compliance be in challenging the draft than hiring a lawyer to argue a 13th Amendment case to a court of law?

Along the same lines, I was at a conference where a man spoke of the compliance problems banks had in providing the Treasury Department with the information it demanded regarding customer banking transactions. In order not to be in violation of the government requirements, the banks were over-reporting such data, a practice that inconvenienced both the banks as well as the reporting agency that was suffering an information overload. The speaker suggested that the legislation be amended to provide a more narrowly-focused definition of what was required.

During the question-and-answer session, I suggested that no such amendment be made; that the banks continue to report -- and, perhaps, to increase the scope -- of such transactions, thus providing the government with more information than it could control. As banking customers, each of us might choose to comply with the avowed purposes of such regulations -- to combat "terrorism" and "drugs," right? -- by sending the Treasury Department a monthly listing of all checks we had written!

If every transaction were reported, that would be the equivalent to no transactions being reported. People try to avoid having large cash transactions reported by breaking them down into separate smaller transactions. But this is a crime, called "structuring". And it turns out that the number of reported transactions over the threshhold is sufficiently large so as to not draw that much attention from the Treasury.

During the Reagan administration, the government mandated the taking and reporting of urine samples to test for drug usage. At the time, I raised the question: what impact might it have on this program to have each one of us mail a small bottle of our urine to the White House every day, so as to satisfy the curiosity of the president? Rather than opposing this program, it might be brought down by our daily compliance -- an act of obedience!

These last ideas take advantage of bureaucracies' love of collecting information but notorious ineffectiveness at separating the wheat from the chaff. One's imagination is the limit in applying the concept. What if every business included with its tax report a list of every single transaction that went to the calculation of the profit or loss? That would bury the IRS and equivalents under paper.

One of the more enjoyable demonstrations of the libertarian value of being overly obedient is found in the wonderful movie Harold and Maude. For those who have not seen this film, Harold is an iconoclastic denizen of the dark side. His constant faking of suicides to get the attention of his mother finally leads her to set up a meeting with her brother -- an Army general -- in an effort to get Harold interested in a military career. During his conversation with the general, Harold asks if he would be able to gather some "souvenirs" while in combat, "an eye, an ear, privates" or "one of these," whereupon he presents his uncle with a shrunken head. After earlier efforts to persuade Harold to join the Army, his uncle now tells him that he believes the military is not for him.

Such examples may open the minds of some to a wider variety of creative responses to statism. Neither blind obedience nor knee-jerk reaction are qualities to be embraced by intelligent minds. It has been the combined influence of such behavior that has made the world the madhouse that it is. But when engaged in selectively and with reasoned insight, obedience can occasionally produce beneficial consequences for a free and peaceful society. In helping the state play out the unintended consequences of its contradictions, an over-zealous cooperation may cause the state to dismantle itself.

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