Tuesday, September 30, 2008

Outrageous: Runaway Taxes

When U.S. companies go into business overseas, it's American workers who get stuck with the bill.

Huge European bank fails

fortis_hq.03.jpgThree European governments stepped in to rescue Dutch-Belgian bank Fortis with an injection of $16.4 billion.

BRUSSELS, Belgium (AP) -- Dutch-Belgian bank and insurance giant Fortis NV was given a 11.2 billion euro ($16.4 billion) lifeline to avert insolvency as part of a wider bailout plan agreed to by Belgium, the Netherlands and Luxembourg, officials said Sunday.

Belgium's Prime Minister Yves Leterme said the bailout shows account holders and investors that Fortis will not be allowed to fall victim to the global credit crisis.

Leterme announced the deal after weekend talks between the three countries, European Union and national banking officials.

The deal will force the bank -- which has headquarters in both Brussels and the Dutch city of Utrecht -- to sell its stake in Dutch bank ABN Amro, which it partially took over last year. Fortis paid 24 billion euros for its share of ABN.

Fortis Chairman Maurice Lippens will be forced to resign and will be replaced by a candidate from outside the company, Leterme said.

"We have taken up our responsibility, we did not abandon" account holders, Leterme told reporters.

Under the bailout, Belgium will invest 4.7 billion euros ($6.88 billion) and the Netherlands 4 billion euros ($5.86 billion) in Fortis' banking operations in the two countries. In return, they each receive 49 percent ownership in those national arms of the bank.

Luxembourg will invest 2.7 billion euros ($3.95 billion) in the bank's Luxembourg operations, also for a 49 percent stake.

The deal, orchestrated by the three neighboring countries and EU Central Bank chief Jean-Claude Trichet, is meant to restore confidence in the bank before the reopening of markets on Monday after a tumultuous week in which Fortis' shares imploded.

Belgian officials also announced Sunday that they planned to offer better guarantees for all retail deposits at Fortis, the country's largest bank and largest private employer.

Fortis named its third chief executive officer in as many months Friday after insolvency fears caused the company's shares to tumble to 5.18 euros ($7.56), their lowest level in more than a decade. The shares have lost more than three-fourths of their value in the past year.

Fortis denies any imminent solvency problems, but it has been in trouble since it took part in a three-bank consortium last year that acquired ABN Amro in a 70 billion euros ($102.5 billion) deal that was the largest takeover in the history of the banking industry.

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Loose Money And the Roots Of the Crisis

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

-- T.S. Eliot
"The Hollow Men" (1925)

The world is not ending. Despite the wrenching turmoil in global financial markets and morbid allusions to the death throes of capitalism, it ain't over. Not until people quit believing in themselves, not until people quit believing in a better future.

[Loose Money and the Root of the Crisis] Corbis

But the whimpering is real, and justified, because it hurts to have your world come crashing down. And global financial markets are definitely crashing, even when the impact is momentarily softened through massive injections of artificial money -- "artificial" because the fiat money does not represent a store of genuine value but rather an airy government claim to future wealth yet to be created.

In the aftermath of this financial catastrophe, as we sort out causes and assign blame, with experts offering various solutions -- More regulation! Less complex financial instruments! -- let's not lose sight of the most fundamental component of finance. No credit-default swap, no exotic derivative, can be structured without stipulating the monetary unit of account in which its value is calculated. Money is the medium of exchange -- the measure, the standard, the store of value -- which defines the very substance of the economic contract between buyer and seller. It is the basic element, the atom of financial matter.

It is the money that is broken.

These days, we don't often refer to the validity of the money itself but rather to "monetary policy" and how the Federal Reserve has managed to calibrate the money supply to economic activity over the last two decades. There are plenty of critiques; the most pointed ones blame former Fed chief Alan Greenspan for keeping interest rates too low, too long.

During his 19 years at the monetary helm -- from 1987 to 2006 -- Mr. Greenspan served under four different U.S. presidents. At least one of them, George H.W. Bush, blamed Mr. Greenspan for keeping interest rates too high. The stock market crash that occurred in October 1987, two months after Mr. Greenspan's confirmation under Ronald Reagan, sent the Dow Jones Industrial Average down 508 points (23%). It required huge injections of liquidity, which subsequently needed to be mopped up with tighter monetary policy. "I reappointed him," the elder President Bush said. "And he disappointed me."

President Clinton likewise reappointed Mr. Greenspan -- and soon learned the terms of the trade-off for reduced short-term interest rates: Bring down the fiscal budget deficit. Spurred on by a Republican Congress, it actually happened; the federal budget was balanced in 1998. All too briefly, the Fed's biggest concern was how to carry out future monetary policy if we ran out of government debt securities for open-market operations. The fiscal deficit subsequently ballooned after 2001, due to spending in excess of revenue growth, while interest rates and unemployment -- and inflation, counterintuitively -- remained low. One thing for sure: We will have more than enough government debt securities.

There's a reason for this short diversion into Mr. Greenspan's long watch. While he is readily demonized today -- Italy's finance minister recently characterized him as the man who, after Osama bin Laden, "hurt America the most" -- Mr. Greenspan is also the man who was awarded the Presidential Medal of Freedom and whose honorary titles include Knight Commander of the British Empire and Commander of the French Legion d'honneur.

So how does such an accomplished central banker turn out to be a monetary doofus?

Scapegoats are wonderfully convenient receptacles for our collective disappointment, but that's all. When credit markets seize up, when financial instruments disintegrate, when the dollar fails -- it's not because Alan Greenspan was not sufficiently omniscient. He wasn't, true. But no one ever was. No one ever could be.

If capitalism depends on designating a person of godlike abilities to manage demand and supply for all forms of money and credit -- currency, demand deposits, money-market funds, repurchase agreements, equities, mortgages, corporate debt -- we are as doomed as those wretched citizens who relied on central planning for their economic salvation.

Think of it: Nothing is more vital to capitalism than capital, the financial seed corn dedicated to next year's crop. Yet we, believers in free markets, allow the price of capital, i.e., the interest rate on loanable funds, to be fixed by a central committee in accordance with government objectives. We might as well resurrect Gosplan, the old Soviet State Planning Committee, and ask them to draw up the next five-year plan.

"There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard." It would be easy to dismiss this statement as a quaint relic from Mr. Greenspan's earlier days as an Ayn Rand acolyte; his article on "Gold and Economic Freedom" appears in her 1966 compendium "Capitalism: The Unknown Ideal." But Mr. Greenspan said it, rather emphatically, last October on the Fox Business Network. He was responding to the interviewer's question: "Why do we need a central bank?"

Whatever well-intentioned reasons existed in 1913 for creating the Federal Reserve -- to provide an elastic currency to soften the blow of economic contractions caused by "irrational exuberance" (and that will never be conquered, so long as humans have aspirations) -- one would be hard-pressed to say that the financial fallout from this latest money meltdown will have less damaging consequences for the average person than would have been incurred under a gold standard.

Moreover, the mission of the central bank has been greatly compromised. Can anyone have faith that Fed policy decisions going into the future will deliver more reliable money? Don't we already know in our bones that the cost of this latest financial nightmare will be born by all of us who store the value of our labor and measure our purchasing power in the form of dollars? As John Maynard Keynes, the famous British economist, observed in his "Tract on Monetary Reform," published in 1923:

"It is common to speak as though, when a Government pays its way by inflation, the people of the country avoid taxation. We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit."

The entire world has been affected by the breakdown of the U.S. financial system, thanks to the globalization of investment capital. But the free flow of capital -- along with free trade -- is a good thing, the best path to global prosperity. The problem is that the role of the dollar as the world's primary reserve currency has been called into serious question, both by allies and adversaries. Writing in the People's Daily, Chinese economist Shi Jianxun laments: "The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."

Let's do exactly that. It is time to take on the task of establishing a new foundation for international economic relations and financial relations -- one dedicated to open markets and based on monetary integrity. Every country is responsible for anchoring its own currency to the universal reserve asset, and every citizen has the right to convert the national currency into the universal reserve asset.

That's how a gold standard works. A bimetallic system, linked to silver and gold, works the same way. In either case the money is fixed to a common anchor -- and thus automatically functions as a common currency to serve the needs of legitimate producers and consumers throughout the world.

How would such an approach cure financial market ills? Nothing can rescue humans from occasionally making bad choices or succumbing to herding instincts. But on the same principle as democracy and free elections, embedded in the aggregate judgment of individuals over time is a wisdom that outperforms the most ostensibly savvy administrator. Sound money would go a long way toward eliminating the distortions that pervert financial decisions and credit allocations. Price signals do matter; if they don't, then free markets don't matter, and capitalism doesn't work. In which case, let government dictate demand and regulate supply.

No, we need to fix the money. Literally.

One of the candidates for president of the United States might issue the call for international monetary reform. Bad timing? The memo that resulted in the 1944 Bretton Woods international monetary agreement was written three weeks after Japan attacked Pearl Harbor. The next global conference need not take place in Bretton Woods, N.H., but rather Paris or Shanghai. Countries should participate on a voluntary basis, no coercion, in full recognition that the goal is to hammer out a new financial order where the validity of the monetary unit of account is not determined by hollow men roaming the marble halls of government central banks.

This is where the new world of sound money begins. This is where the unknown ideal of capitalism takes form.

Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

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Bush had no plan to catch Bin Laden

By Gareth Porter

WASHINGTON - New evidence from former United States officials reveals that Osama bin Laden and other al-Qaeda leaders were able to skip Afghanistan for Pakistan unimpeded in the first weeks after September 11, 2001, as the George W Bush administration failed to plan to block their retreat.

Top administration officials instead gave priority to planning for war with Iraq, leaving the United States with not nearly enough troops or strategic airlift capacity to close the large number of possible exit routes through the Afghanistan-Pakistan border area where Bin Laden escaped in late 2001.

Because it had not been directed to plan for that contingency, the US military was also forced to turn down an offer from then Pakistani president Pervez Musharraf in late November 2001 to send 60,000 troops to intercept the al-Qaeda leaders.

As Northern Alliance troops marched on Kabul with little resistance in November 2001, the Central Intelligence Agency had intelligence that Bin Laden was headed for a cave complex in the Tora Bora Mountains close to the Pakistani border.

The war had ended only days earlier, much more quickly than expected, and United States Central Command (CENTCOM) commander Tommy Franks, responsible for the war in Afghanistan, had no forces in position to block bin Laden's exit.

Franks asked Lieutenant General Paul T Mikolashek, commander of Army Central Command (ARCENT), if his command could provide a blocking force between al-Qaeda and the Pakistani border, according to David W Lamm, who was then commander of ARCENT Kuwait.

Lamm, a retired army colonel, recalled in an interview that there was no way to fulfill the CENTCOM commander's request, because ARCENT had neither the troops nor the strategic lift in Kuwait required to put such a force in place.

"You looked at that request, and you just shook your head," recalled Lamm, now chief of staff of the Near East South Asia Center for Strategic Studies at the National Defense University.

Franks apparently already realized that he would need Pakistani help in blocking the al-Qaeda exit from Tora Bora. Secretary of defense Donald Rumsfeld told a National Security Council meeting that Franks "wants the [Pakistanis] to close the transit points between Afghanistan and Pakistan to seal what's going in and out", according to the National Security Council meeting transcript in Bob Woodward's book Bush at War.

Bush responded that they would need to "press Musharraf to do that".

A few days later, Franks made an unannounced trip to Islamabad to ask Pakistani leader Pervez Musharraf to deploy troops along the Pakistan-Afghan border near Tora Bora.

A deputy to Franks, Lieutenant General Mike DeLong, later claimed that Musharraf had refused Franks's request for regular Pakistani troops to be repositioned from the north to the border near the Tora Bora area. DeLong wrote in his 2004 book Inside Centcom that Musharraf had said he "couldn't do that", because it would spark a "civil war" with a hostile tribal population.

But US ambassador Wendy Chamberlin, who accompanied Franks to the meeting with Musharraf, provided an account of the meeting to this writer that contradicts DeLong's claim.

Chamberlin, now president of the Middle East Institute in Washington, recalled that the Pakistani president told Franks that CENTCOM had vastly underestimated what was required to block bin Laden's exit from Afghanistan. Musharraf said, "Look you are missing the point: there are 150 valleys through which al-Qaeda are going to stream into Pakistan," according to Chamberlin.

Although Musharraf admitted that the Pakistani government had never exercised control over the border area, the former diplomat recalled, he said this was "a good time to begin". The Pakistani president offered to redeploy 60,000 troops to the area from the border with India but said his army would need airlift assistance from the United States.

But the Pakistani redeployment never happened, according to Lamm, because it wasn't logistically feasible. Lamm recalled that it would have required an entire aviation brigade, including hundreds of helicopters, and hundreds of support troops to deliver that many combat troops to the border region - far more than was available.

Lamm said the ARCENT had so few strategic lift resources that it had to use commercial aircraft at one point to move US supplies in and out of Afghanistan.

Even if the helicopters had been available, however, they could not have operated with high effectiveness in the mountainous Afghanistan-Pakistan border region near the Tora Bora caves, according to Lamm, due to a combination of high altitude and extreme weather.

Franks did manage to insert 1,200 marines into Kandahar on November 26 to establish control of the airbase there. They were carried to the base by helicopters from an aircraft carrier that had steamed into the Gulf from the Pacific, according to Lamm.

The marines patrolled roads in the Kandahar area hoping to intercept al-Qaeda officials heading toward Pakistan. But DeLong, now retired, said in an interview that the marines would not have been able to undertake the blocking mission at the border. "It wouldn't have worked - even if we could have gotten them up there," he said. "There weren't enough to police 1,500 kilometers of border."

US troops probably would also have faced armed resistance from the local tribal population in the border region, according to DeLong. The tribesmen in local villages near the border "liked bin Laden", he said "because he had given them millions of dollars".

Had the Bush administration's priority been to capture or kill the al-Qaeda leadership, it would have deployed the necessary ground troops and airlift resources in the theater over a period of months before the offensive in Afghanistan began.

"You could have moved American troops along the Pakistani border before you went into Afghanistan," said Lamm. But that would have meant waiting until spring 2002 to take the offensive against the Taliban, according to Lamm.

The views of Bush's key advisers, however, ruled out any such plan from the start. During the summer of 2001 Rumsfeld refused to develop contingency plans for military action against al-Qaeda in Afghanistan, despite a National Security Presidential Directive that called for such planning, according to the 9-11 Commission report.

Rumsfeld and deputy defense secretary Paul Wolfowitz resisted such planning for Afghanistan because they were hoping that the White House would move quickly on military intervention in Iraq. According to the 9-11 Commission, at four deputies' meetings on Iraq between May 31 and July 26, 2001, Wolfowitz pushed his idea to have US troops seize all the oil fields in southern Iraq.

Even after September 11, Rumsfeld, Wolfowitz and Vice President Dick Cheney continued to resist any military engagement in Afghanistan, because they were hoping for war against Iraq instead.

Bush's top secret order of September 17 for war with Afghanistan also directed the Pentagon to begin planning for an invasion of Iraq, according to journalist James Bamford's book Pretext for War.

Cheney and Rumsfeld pushed for a quick victory in Afghanistan in NSC meetings in October, as recounted by both Woodward and Undersecretary of Defense Douglas Feith. Lost in the eagerness to wrap up the Taliban and get on with the Iraq War was any possibility of preventing Bin Laden's escape to Pakistan.

Gareth Porter is an investigative historian and journalist specializing in US national security policy. The paperback edition of his latest book, Perils of Dominance: Imbalance of Power and the Road to War in Vietnam, was published in 2006.

(Inter Press Service)

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How Not To Panic About The Stock Market

Seeing the greatest single-day drop in the Dow is probably not the kind of history anyone wants to be living through right now. The failure of the bailout bill to pass caused a big freakout in the market, which thought we were going to get a bailout today. But before you click the button to transfer all your investments to 0% return T-bonds (aka I give up on investing), first ask yourself if that's really in line with your long-term investment goals. Secondly, realize that point-wise it might the greatest drop, but it's not the greatest drop percentage-wise. In other words, we've been here, and bounced back, before. If you're decades away from retirement, today's plunge is a buying opportunity. Here are some thoughts about fighting the urge to panic.

If you're older, you can make sure your investment mix is balanced and in-line with your investment plan. For instance, this easy calculator from the Iowa Public Employees Retirement System can you give you some ideas. Just adjust the sliders to correspond with your age, income requirements, etc, though it is of course only a starting point in your research. A recent Vanguard article on the importance of asset allocation is another good place to begin.

The one thing that you can do, regardless of age, if you're investing in any kind of fund is make sure your expense ratios are low. These are the various fees your fund is charging you to invest it. Typically index funds offer the lowest expense ratios. Expense ratios work like the fund earning compound interest on your money, which, after years, can add up to tens of thousands of dollars less in your pocket. (see our post "What Are "Expense Ratios?" and "How Your 401(k) Is Ripping You Off"

If this sounds like the same stuff you always hear, that's because it is. The point of that same old stuff is that you make a solid long-term plan and you stick with it, whether times are good, bad, or apocalyptic. Now, as ever, timing the market is unwise. Dollar-cost-averaging, where you put the same amount every month, is a good way to go. In general, and over time, the stock market rises. And, eventually, Washington will figure out a bailout plan.

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State Considers Advertising on Amber Alerts

by Christine Pelisek

The Schwarzenegger administration is considering advertisements on freeway signs used for Amber Alerts and other emergencies.

The advertisements would be posted on 674 electronic roadside message boards according to the LA Times. The funds raised – estimated at millions - would go towards the financially strapped highway fund.

The Times reported that the plan was introduced by Clear Channel, which stands to make millions if the proposal goes through. Legislation has already been drafted with the involvement of state Sen. George Runner (R-Lancaster), who drafted the bill that brought the Amber Alert system to California. According to the Times, the Schwarzenegger administration “touted the idea” in a letter to the U.S. Transportation Secretary.

The proposal would be up for bid and the winner would replace the state's old emergency message signs with new flashy video screens that would show advertisements when it wasn’t posting Amber Alerts.

The proposal has raised the ire of traffic safety activists who believe that the advertisements would be too distracting to drivers.

"This proposal recklessly ignores issues of traffic safety, visual blight, and the ongoing privatization of public space by allowing our visual environment to be filled with commercial messages," says Dennis Hathaway, president of the Coalition to Ban Billboard Blight. "Those signs were intended to give motorists important information about highway conditions and emergencies, not inducements to buy the latest products and services. No matter how badly the state needs revenue, this is absolutely the wrong way to go about raising it."

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Fed Pumps Further $630 Billion Into Financial System (Update3)

By Scott Lanman and Craig Torres

Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.

``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode.''

The MSCI World Index of stocks in 23 developed markets sank 6 percent, the most since its creation in 1970. Credit markets deteriorated further as authorities tried to save more financial institutions from collapse.

European Rescue

European governments have rescued four banks in two days and the Federal Deposit Insurance Corp. said today it helped Citigroup Inc. buy the banking operations of Wachovia Corp. after its shares collapsed. The Standard & Poor's 500 Index fell 3.8 percent and the cost of borrowing dollars for three months rose to the highest since January. The rate for euros hit a record.

``If people think the authorities may give in to fears, they are wrong,'' Financial Stability Forum Chairman Mario Draghi said today in Amsterdam, where the international group of regulators and finance officials is meeting. ``There is willingness and determination on winning the battle to restore confidence and stability.''

Banks and brokers have slowed lending as they struggle to restore their capital after $586 billion in credit losses and writedowns since the mortgage crisis began a year ago. The bankruptcy of Lehman Brothers Holdings Inc. also sparked fears among banks they wouldn't be repaid by counterparties, driving up the cost of short-term loans between banks.

Funding Risk

``By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk,'' the central bank said.

The Bank of England and the ECB will each double the size of their dollar swap facilities with the Fed to as much as $80 billion and $240 billion, respectively. The Swiss National Bank and the Bank of Japan will also double their dollar swap lines, while the central banks in Australia, Norway, Sweden, Denmark and Canada tripled theirs.

All the banks extended their facilities until the end of April 2009.

The Fed is also increasing the size of its three 84-day TAF sales to $75 billion apiece, from $25 billion. That means the Fed will make a total of $225 billion available in 84-day loans. The central bank will keep the sales of 28-day credit at $75 billion.

Special Sales

In addition, the Fed will hold two special TAF sales in November totaling $150 billion so banks can have funding available for one or two weeks over year-end. The exact timing and terms will be determined later, the Fed said. The TAF program began in December, totaling $40 billion.

The bank-rescue plan being debated by Congress today would give the Fed more power over short-term interest rates by providing authority as of Oct. 1 to pay interest on reserves held at the central bank by financial institutions. That would make it easier for the Fed to pump funds into the banking system.

Paying interest on reserves puts a ``floor'' under the traded overnight rate, which would allow a central bank ``to provide liquidity during times of stress'' without affecting the rate, New York Fed economists said in a paper last month.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.netCraig Torres in Washington at ctorres3@bloomberg.net.

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Commentary: Bankruptcy, not bailout, is the right answer

By Jeffrey A. Miron
Special to CNN

Economist Jeffrey Miron says the bailout plan presented to Congress was the wrong solution to the crisis

Economist Jeffrey Miron says the bailout plan presented to Congress was the wrong solution to the crisis

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

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"War on terror" has not weakened al Qaeda: poll

LONDON (Reuters) - People across the world think the U.S.-led "war on terror" has not weakened al Qaeda and many believe it has actually strengthened Osama bin Laden's network, a poll for the BBC World Service said on Monday.

The poll of almost 24,000 citizens found people in 22 out of 23 countries surveyed thought attempts to counter al Qaeda since its September 11, 2001 attacks on the United States had not weakened it.

The predominant view was that neither side was winning, the BBC said.

"Despite its overwhelming military power, America's war against al Qaeda is widely seen as having achieved nothing better than a stalemate and many believe that it has even strengthened al Qaeda," said Steven Kull, director of the Program on International Policy Attitudes, which helped carry out the research.

Kenya -- which experienced deadly al Qaeda attacks on the U.S. embassy in 1998 and on an Israeli-owned hotel in 2002 -- was the only country where a majority thought al Qaeda has been weakened.

In the United States, only 34 percent believed al Qaeda had been made weaker with 26 percent reckoning the "war on terror" had had no effect and 33 percent thinking it had made the militants stronger.

The majority U.S. perception was that neither the United States nor al Qaeda were winning.

More than 40 percent of citizens in France, Mexico, Italy, Australia and Britain believed the "war on terror" had strengthened al Qaeda.

While the majority of people questioned had negative views of al Qaeda, more citizens in Egypt and Pakistan had mixed or positive views of the group than negative feelings.

The poll, conducted by GlobeScan with the Program on International Policy Attitudes at the University of Maryland, involved 23,937 people in 23 countries between July and September 2008.

(Reporting by Michael Holden; Editing by Mark Trevelyan)

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