The machinelike society

America's Unique Fascism

by Anthony Gregory

Five years ago, antiwar liberals calling the Bush administration fascist were labeled as kooks, marginalized by their own party leadership, accused by conservatives of treasonous thoughts worthy of federal punishment, even deportation. A few years pass, the policies hardly change, and the political dynamic turns upside down: tea-party conservatives accusing the Obama regime of fascist impulses are compared to terrorists, accused of being racists, told that their hyperbole is a real threat to the country's security.

The establishment derides both groups for their fringe outlook on America, convinced that the United States is anything but a fascist country. After all, isn't America the nation that defeated fascism in the 1940s? Sensible conservatives and liberals agree with that.

The unappreciated reality is that when the patriot Right and radical Left refer to the US system as fascistic, they have part of the truth but not the whole analysis. This is due to the blinders both sides wear concerning state power. Moreover, the criticisms sometimes fail to take account of America's very unique strain of fascism. This political program is distinct in every nation, always taking a different form but with some general themes in common. US fascism is a most insidious mixture of the key ingredients while maintaining the necessary nuance to snooker the masses, the media, and the respectable folks across the spectrum.

The FDR-Bush Program of Economic Corporatism

First, and this is key, we must look at the economic system. The left-liberals are proud to have had a role in creating its social-democratic elements. The conservatives are proud of America's towering financial and military institutions. Republicans and Democrats all pretend America has a free-enterprise system, attacking greedy profiteers while crediting themselves for the benefits of capitalism, blaming laissez-faire for all our problems while dissonantly congratulating themselves for having supplanted it with sensible regulation and safety nets once and for all.

The dirty little secret is that there has been a bipartisan project of corporatism, the economic underpinning of fascism, for almost a century. The regulatory bureaus, the banking establishment, agricultural policy, telecommunications planning, even the welfare state all enrich corporate interests, but at the ultimate direction of the state. One could say this arrangement was foreshadowed in Lincoln or even Hamilton. But it was during the World Wars and New Deal that the nation embarked upon something decisively fascistic.

Hitler, Mussolini, and the other fascists all employed a general approach of co-opting the market through huge governmental takeovers of industry while maintaining the pretense of private property. Along with this came interventions that would be considered socialistic in other contexts. Lew Rockwell very nicely summed up the economic programs of Hitler, which mirror the great prides of Progressive politics of the 20th century:

He suspended the gold standard, embarked on huge public works programs like Autobahns, protected industry from foreign competition, expanded credit, instituted jobs programs, bullied the private sector on prices and production decisions, vastly expanded the military, enforced capital controls, instituted family planning, penalized smoking, brought about national healthcare and unemployment insurance, imposed education standards, and eventually ran huge deficits. The Nazi interventionist program was essential to the regime's rejection of the market economy and its embrace of socialism in one country.

Much of this agenda was adopted in the United States during World War I, and then brought back to life in the New Deal. John T. Flynn, a leftist who initially supported Franklin Roosevelt then became disenchanted with the president's program of central planning, described the 1930s atmosphere of political ideology in his seminal work The Roosevelt Myth:

There was indeed a good deal of tolerance for the idea of planning our capitalist system even in the most conservative circles. And a man could support publicly and with vehemence this system of the Planned Economy without incurring the odium of being too much of a radical for polite and practical society.

"The United States boasts one of the most significant corporatist arrangements in the world in its alliance between the Federal Reserve and the big banks."

There was only one trouble with it. This was what Mussolini had adopted — the Planned Capitalist State. And he gave it a name — fascism. Then came Hitler and adopted the same idea. His party was called the Nazi party, which was derived from the initials of its true name, but it was dedicated to fascism….

Whatever it was, it was the direct opposite of liberalism. It was an attempt, somewhere between Communism and capitalism, to organize a stable society and to do it by setting up a State equipped with massive powers over the lives and fortunes of the citizens…. Yet this curiously un-American doctrine was being peddled in America as the bright flower of the liberals. Of course they did not call it fascism, because that had a bad name…. They called in the Planned economy. But it was and is fascism by whatever name it is known.

In specific, FDR's National Recovery Administration was fashioned after the industrial policy of Mussolini. Flynn explains:

[Mussolini] organized each trade or industrial group or professional group into a state-supervised trade association. He called it a corporative. These corporatives operated under state supervision and could plan production, quality, prices, distribution, labor standards, etc. The NRA provided that in America each industry should be organized into a federally supervised trade association. It was not called a corporative. It was called a Code Authority. But it was essentially the same thing. These code authorities could regulate production, quantities, qualities, prices, distribution methods, etc., under the supervision of the NRA. This was fascism.

The sick man Europe

LETHALLY LEISURED

By Mark Steyn

In 1853 or thereabouts, Czar Nicholas I described Turkey as the sick man of Europe. A century and a half later, Turkey is increasingly the strong man of the Middle East, and the sick man of Europe is Europe — or, rather, "Europe." The transformation of a geographical patchwork of nation-states into a single political entity has been the dominant Big Idea of the post-war era, the Big Idea the Continent's elites turned to after all the other Big Ideas — Fascism, Nazism, and eventually Communism — failed, spectacularly. The West's last Big Idea is now dying in the eurozone debt crisis. Although less obviously malign than the big totalitarian -isms, this particular idea has proved so insinuating and debilitating that the only question is whether most of the West dies with it.

"Europe" has a basic identity crisis: As the Germans have begun to figure out, just because the Greeks live in the same general neighborhood is no reason to open a joint checking account. And yet a decade ago, when it counted, everyone who mattered on the Continent assumed a common currency for nations with nothing in common was so obviously brilliant an idea it was barely worth explaining to the masses. In the absence of ethnic or cultural compatibility, the European Union offered Big Government as a substitute: The project was propped up by two pillars — social welfare and defense welfare. The former regulated Europe into economic sloth even as India, China, and Brazil began figuring out how this capitalism thing worked. The latter meant that the U.S. defense umbrella ensured once-lavish budgets for hussars and lancers could be reallocated to government health care and other lollipops — and it still wasn't enough. Whatever the individual merits of ever-more-leisurely education, 30-hour work weeks, six weeks' vacation, retirement at 50, the cumulative impact is that not enough people do not enough work for not enough of their lives. And once large numbers of people acquire the habits of a leisured class, there are not many easy ways back to reality.

Defense welfare does the same at a geopolitical level. In absolving the Continent of responsibility for its own defense, the United States not only enabled Europe to beat its swords into Ponzi shares but, in a subtle and profound way, helped enervate the survival instincts of some of the oldest nation-states on the planet. I tend to agree with John Keegan, the great military historian and my old Telegraph colleague, that a nation without a military is in a sense no longer a nation. One of the few remaining serious second-tier powers is now joining their ranks: Under the "Conservative" premiership of David Cameron, a nation that within living memory governed a fifth of the earth's surface and a quarter of its population and provided what global order there was for much of the rest will have a military incapable of independent force projection. Were the Argies to seize the Falklands today, Her Majesty's Government would have to content itself with going to the U.N. and getting a strong resolution. Were the toppling of Saddam to be attempted today, Britain would be incapable of reprising the role it played eight years ago — of holding down the lower third of Iraq all but singlehanded while the Yanks pressed on to Baghdad. But beyond that, in a more general sense, nations that abandon their militaries tend also to abandon their national interests: Increasingly, instead of policies, they have attitudes. "Global warming" — "saving" the planet — is the perfect preoccupation for the ever-more-refined sensibilities of the post-national nation.

While Europe slept in and slept around, new powers emerged. China and India, on course to be the world's top two economies within a couple of decades, both act as more or less conventional nation-states. So too do Iran, Saudi Arabia, Turkey — and many lesser players. We live on a planet in which the wealthiest societies in history, from Norway to New Zealand, are incapable of defending their own borders while basket cases like North Korea and Pakistan have gone nuclear, and Sudan and Somalia are anxious to follow. Whatever supple lies it may tell itself, a rich nation that cannot bother keeping up an army is retreating not only from imperialism and conquest but also from greatness. Continentals enjoy more paid leisure time than anybody else, yet they produce less and less great art, music, literature. A land of universal welfare invariably universalizes mediocrity.

Whether Greece defaults or gets bailed out one mo' time doesn't really matter: It's insolvent, and there isn't enough money in Germany to obscure that fact indefinitely. The longer "political reality" tries to dodge real reality, the bloodier the eventual reacquaintance will be. Europeans are going to have to relearn impulses three generations of Continentals have learned to regard as hopelessly vulgar. Can they do that? A land of 30-year-old students and 50-year-old retirees has so thoroughly diverted the great stream of life that it barely comprehends what's at stake. "Europe" as a geopolitical rather than geographical concept has been for half a century the most conventional of conventional wisdom. Those, like Britain's Euroskeptics, who dissented from it were derided as "swivel-eyed" "loony tunes." The loons were right, and the smart set — the political class, the universities, the BBC, Le Monde — were wrong. "Europe" was a blueprint for sclerosis and decline, and then a sudden, devastating fall. As the "loony tunes" could have told them, it ends with, "That's all, folks."

Another fatal conceit

In Praise of the Capitalist 1 Percent

by George Reisman

The protesters in the Occupy Wall Street movement and its numerous clones elsewhere in the country and around the world chant that 1 percent of the population owns all the wealth and lives at the expense of the remaining 99 percent. The obvious solution that they imply is for the 99 percent to seize the wealth of the 1 percent and use it for their benefit rather than allowing it to continue to be used for the benefit of the 1 percent, who are allegedly undeserving greedy capitalist exploiters. In other words, the implicit program of the protesters is that of socialism and the redistribution of wealth.

Putting aside the hyperbole in the movement's claim, it is true that a relatively small minority of people does own the far greater part of the wealth of the country. The figures "1 percent" and "99 percent," however exaggerated, serve to place that fact in the strongest possible light.

The protesters have no awareness of this, because they see the world through an intellectual lens that is inappropriate to life under capitalism and its market economy. They see a world, still present in some places, and present everywhere a few centuries ago, of self-sufficient farm families, each producing for its own consumption and having no essential connection to markets.

In such a world, if one sees a farmer's field, or his barn, or plow, or draft animals, and asks who do these means of production serve, the answer is the farmer and his family, and no one else. In such a world, apart from the receipt of occasional charity from the owners, those who are not owners of means of production cannot benefit from means of production unless and until they themselves somehow become owners of means of production. They cannot benefit from other people's means of production except by inheriting them or by seizing them.

In the world of the protesters, means of production have the same essential status as consumers' goods, which as a rule are of benefit only to their owners. It is because of this that those who share the mentality of the protesters typically depict capitalists as fat men, whose plates are heaped high with food, while the masses of wage earners must live near starvation. According to this mentality, the redistribution of wealth is a matter merely of taking from the overflowing plates of the capitalists and giving to the starving workers.

Contrary to such beliefs, in the modern world in which we actually live, the wealth of the capitalists is simply not in the form of consumers' goods to any great extent. Not only is it overwhelmingly in the form of means of production, but those means of production are employed in the production of goods and services that are sold in the market. Totally unlike the conditions of self-sufficient farm families, the physical beneficiaries of the capitalists' means of production are all the members of the general consuming public who buy the capitalists' products.

For example, without owning so much as a single share of stock in General Motors or Exxon Mobil, everyone in a capitalist economy who buys the products of these firms benefits from their means of production: the buyer of a GM automobile benefits from the GM factory that produced that automobile; the buyer of Exxon's gasoline benefits from its oil wells, pipelines, and tanker trucks. Furthermore, everyone benefits from their means of production who buys the products of the customers of GM or Exxon, insofar as their means of production indirectly contribute to the products of their customers. For example, the patrons of grocery stores whose goods are delivered in trucks made by GM or fueled by diesel oil produced in Exxon's refineries are beneficiaries of the existence of GM's truck factories and Exxon's refineries. Even everyone who buys the products of the competitors of GM and Exxon, or of the customers of those competitors, benefits from the existence of GM's and Exxon's means of production. This is because GM's and Exxon's means of production result in a more abundant and thus lower-priced supply of the kind of goods the competitors sell.

In other words, all of us, 100 percent of us, benefit from the wealth of the hated capitalists. We benefit without ourselves being capitalists, or being capitalists to any great extent. The protesters are literally kept alive on the foundation of the wealth of the capitalists they hate. As just indicated, the oil fields and pipelines of the hated Exxon corporation provide the fuel that powers the tractors and trucks that are essential to the production and delivery of the food the protesters eat. The protesters and all other haters of capitalists hate the foundations of their own existence.

The best tax is always the lightest

The Consumption Tax: A Critique

by Murray N. Rothbard

The Alleged Superiority of the Income Tax

Orthodox neoclassical economics has long maintained that, from the point of view of the taxed themselves, an income tax is "better than" an excise tax on a particular form of consumption, since, in addition to the total revenue extracted, which is assumed to be the same in both cases, the excise tax weights the levy heavily against a particular consumer good. In addition to the total amount levied, therefore, an excise tax skews and distorts spending and resources away from the consumers' preferred consumption patterns. Indifference curves are trotted out with a flourish to lend the scientific patina of geometry to this demonstration.

As in many other cases when economists rush to judge various courses of action as "good," "superior," or "optimal," however, the ceteris paribus assumptions underlying such judgments — in this case, for example, that total revenue remains the same — do not always hold up in real life. Thus, it is certainly possible, for political or other reasons, that one particular form of tax is not likely to result in the same total revenue as another. The nature of a particular tax might lead to less or more revenue than another tax. Suppose, for example, that all present taxes are abolished and that the same total is to be raised from a new capitation, or head, tax, which requires that every inhabitant of the United States pay an equal amount to the support of federal, state, and local government. This would mean that the existing total government revenue of the United States, which we estimate at 1 trillion, 380 million dollars — and here exact figures are not important — would have to be divided between an approximate total of 243 million people. Which would mean that every man, woman, and child in America would be required to pay to government each and every year, $5,680. Somehow, I don't believe that anything like this large a sum could be collectible by the authorities, no matter how many enforcement powers are granted the IRS. A clear example where the ceteris paribus assumption flagrantly breaks down.

But a more important, if less dramatic, example is nearer at hand. Before World War II, Internal Revenue collected the full amount, in one lump sum, from every taxpayer, on March 15 of each year. (A month's extension was later granted to the long-suffering taxpayers.) During World War II, in order to permit an easier and far smoother collection of the far higher tax rates for financing the war effort, the federal government instituted a plan conceived by the ubiquitous Beardsley Ruml of R.H. Macy & Co., and technically implemented by a bright young economist at the Treasury Department, Milton Friedman. This plan, as all of us know only too well, coerced every employer into the unpaid labor of withholding the tax each month from the employee's paycheck and delivering it to the Treasury. As a result, there was no longer a need for the taxpayer to cough up the total amount in a lump sum each year. We were assured by one and all, at the time, that this new withholding tax was strictly limited to the wartime emergency, and would disappear at the arrival of peace. The rest, alas, is history. But the point is that no one can seriously maintain that an income tax deprived of withholding power, could be collected at its present high levels.

One reason, therefore, that an economist cannot claim that the income tax, or any other tax, is better from the point of view of the taxed person, is that total revenue collected is often a function of the type of tax imposed. And it would seem that, from the point of view of the taxed person, the less extracted from him the better. Even indifference-curve analysis would have to confirm that conclusion. If someone wishes to claim that a taxed person is disappointed at how little tax he is asked to pay, that person is always free to make up the alleged deficiency by making a voluntary gift to the bewildered but happy taxing authorities.[1]

A second insuperable problem with an economist's recommending any form of tax from the alleged point of view of the taxee, is that the taxpayer may well have particular subjective evaluations of the form of tax, apart from the total amount levied. Even if the total revenue extracted from him is the same for tax A and tax B, he may have very different subjective evaluations of the two taxing processes. Let us return, for example, to our case of the income as compared to an excise tax. Income taxes are collected in the course of a coercive and even brutal examination of virtually every aspect of every taxpayer's life by the all-seeing, all-powerful Internal Revenue Service. Each taxpayer, furthermore, is obliged by law to keep accurate records of his income and deductions, and then, painstakingly and truthfully, to fill out and submit the very forms that will tend to incriminate him into tax liability. An excise tax, say on whiskey or on movie admissions, will intrude directly on no one's life and income, but only into the sales of the movie theater or liquor store. I venture to judge that, in evaluating the "superiority" or "inferiority" of different modes of taxation, even the most determined imbiber or moviegoer would cheerfully pay far higher prices for whiskey or movies than neoclassical economists contemplate, in order to avoid the long arm of the IRS.[2]

The Forms of Consumption Tax

In recent years, the old idea of a consumption tax in contrast to an income tax has been put forward by many economists, particularly by allegedly pro-free-market conservatives. Before turning to a critique of the consumption tax as a substitute for the income tax, it should be noted that current proposals for a consumption tax would deprive taxpayers of the psychic joy of eradicating the IRS. For while the discussion is often couched in either-or terms, the various proposals really amount to adding a new consumption tax on top of the current massive armamentarium of taxing power. In short, seeing that income tax levels may have reached their political limits for the time being, our tax consultants and theoreticians are suggesting a shining new tax weapon for the government to wield. Or, in the immortal words of that exemplary economic czar and servant of absolutism, Jean-Baptiste Colbert, the task of the taxing authorities is to "so pluck the goose as to obtain the largest amount of feathers with the least amount of hissing." We the taxpayers, of course, are the geese.

Deadly enemies or intimate friends

The Dalai Lama's War

By Ramachandra Guha

IN THE late autumn of 1962, there was a short, intense border war between India and China. It resulted in the complete rout of an underprepared and poorly led Indian Army. For the two rising powers, the battle—and its outcome—was seen in national, civilizational and ideological terms. These nations were, or at least saw themselves as, carriers of ancient civilizations that had produced great literature, philosophy, architecture, science and much else, but whose further evolution had been rudely interrupted by Western imperialists. India became free of British rule in 1947; China was united under Communist auspices in 1949. The recovery of their national independence was viewed as the prelude to the reemergence of China and India as major forces in the world.

Thus, the defeat of 1962 was at once a defeat of the Indian Army by its Chinese counterpart, a defeat of democracy by Communism, a defeat of one large new nation by another and a defeat of one ancient civilization at the hands of another. In India, the defeat was also interpreted in personal terms, as the defeat of Jawaharlal Nehru, who had held the offices of prime minister and foreign minister continuously since independence in 1947.

That debacle at the hands of China still hangs as a huge cloud over Nehru’s reputation. And there is an intriguing comparison to be made here with his fellow Harrovian, Winston Churchill. British historian Robert Rhodes James once wrote a book called Churchill: A Study in Failure, whose narrative stopped at 1939. It excavated, perhaps in excessive detail, its subject’s erratic and undistinguished career before that date. But of course, all Churchill’s failures were redeemed by his heroic leadership in World War II. It is tempting to see Nehru’s career as being Churchill’s in reverse; marked as it was for many decades by achievement and success, these nullified by the one humiliating failure which broke his nation’s morale and broke his own spirit and body. The war began in October 1962; a year and a half later, Nehru was dead.

It is a legacy that still haunts the Sino-Indian relationship.

NEHRU WAS long interested in (and influenced by) China. His prolific writings—books, letters, speeches—reveal much of the man and how he came to be so deeply misled by the threat he (and his country) faced. Nehru saw China at once as peer, comrade and soul mate. His first major book, Glimpses of World History, published in 1934, puts his predilections on full display. It has as many as 134 index references to the Middle Kingdom. These refer to, among other things, different dynasties (the Tang, Han, Qin, etc), corruption, Communism, civil war, agriculture and banditry. Already, the pairing of China and India was strongly imprinted in Nehru’s framework. Thus China is referred to as “the other great country of Asia” and as “India’s old-time friend.” There was a manifest sympathy with its troubles at the hands of foreigners. The British were savaged for forcing humiliating treaties and opium down the throats of the Chinese, this being an illustration of the “growing arrogance and interference by the western Powers.”

In all his pre-1947 writings, Nehru saw China from the lens of a progressive anti-imperialist, from which perspective India and China were akin and alike, simultaneously fighting Western control as well as feudal remnants in their own societies. Chiang Kai-shek and company, like Nehru and company, were at once freedom fighters, national unifiers and social modernizers. It stood to reason that, when finally rid of foreign domination, the two neighbors would be friends and partners.

In the spring of 1947, with India’s freedom imminent, Nehru organized the Asian Relations Conference in New Delhi. Representatives of Asian nations already free or struggling for independence from European rulers were in attendance. There, Nehru called China “that great country to which Asia owes so much and from which so much is expected.” The conference itself he characterized as

an expression of that deeper urge of the mind and spirit of Asia which has persisted in spite of the isolationism which grew up during the years of European domination. As that domination goes, the walls that surrounded us fall down and we look at each other again and meet as old friends long parted.

Nehru believed that the fundamental areas of disagreement between India and China could be bridged; in particular, the unresolved detritus of the imperialist era that largely centered on Tibet. For back in 1913–14, a meeting was held in the British imperial summer capital, Shimla, convened by the government of India and attended by Chinese and Tibetan representatives (Tibet was by then enjoying a period of substantial, indeed near-complete, political autonomy from Chinese overlordship). Here the McMahon Line (which sought to demarcate the frontiers of British India) was drawn. When India became independent in 1947 it recognized this boundary, which largely followed the path of the Himalaya, and adopted it as its own. By this, Nehru and his government thought that the border between India and China, determined at the Shimla Conference, had been reaffirmed.

"The people want another Shalit"

Israel Should Mourn Prisoner Release

By Benny Morris

It could—perhaps should—have been a day of national mourning. On Tuesday Israel released 477 Palestinian security prisoners, most of them accomplished murderers, mostly of women and children, in exchange for one Israeli soldier. Another 550 prisoners will be released in two months in the deal's second stage. To judge by what followed similar mass prisoner "exchanges" over the past two decades, at least some of those released can be expected to return to terrorism, killing more Israelis, perhaps many more. And Hamas, the Islamist organization that controls the Gaza Strip, took Corporal Gilead Shalit hostage in a cross-border raid five years ago and negotiated the deal, has chalked up an enormous success, making a Hamas victory in the next Palestinian general election (probably in 2012) more than likely.

Yet for Israeli Jews, Tuesday was a day of mass, humane rejoicing as almost all celebrated the return of "their" hostage, held in a dank cellar beneath a Gazan refugee camp in virtual isolation for half a decade without contact with his family, other Israelis or the Red Cross. The Israelis behaved as if they had just won a victory. A happy crowd of smiling, flag- and flower-waving Israelis greeted Shalit as he arrived by helicopter at his home village of Mitzpeh Hila in the Galilee, and most other Israeli Jews spent much of the day glued happily to TV screens. Few talked about the price or the portents for the future. There was genuine, mass, spontaneous joy, as if a family member, almost lost, had miraculously returned home after five years in hell. Shalit looked pale and thin, but in the coerced, awkward interview he gave to Egyptian television during the release process he appeared to have all his wits about him.

In agreeing to this studendously lopsided "exchange"—and Israel, according to Hamas spokesmen, had also committed as part of the deal to easing its semi-blockade of the Gaza Strip—Israel behaved like an extended family. Critics of the deal said that, given its geopolitical situation, Israel needed to behave like a state. (The United States and Britain, for example, refuse, as a matter of policy, to negotiate or concede anything to hostage takers.) But on Tuesday the citizens and leaders of the Jewish state allowed themselves to bask in their sense of solidarity.

Among Palestinians there was also much celebration and joy as the busloads of prisoners reached the Gaza Strip (where hundreds of thousands gathered), the West Bank (where thousands of Hamas supporters, long suppressed by Mahmoud Abbas's Palestinian Authority, came out to cheer) and a number of Israeli Arab villages. The Palestinians, too, spoke of "victory" (in their case, Allah-given). But their festivities, especially in Gaza, were overtly political and laced with bellicosity. Spokesman after spokesman, and many of those interviewed in the crowds, vowed that they would continue the jihad until Israel was eliminated; meanwhile, they promised fresh attacks on Israel, especially ones designed to take hostages to obtain further prisoner releases.

Many Israeli observers suggested that the mass release would not only heighten the motivation among Hamas members to take new hostages but would also prompt the rival (ostensibly secular) Fatah Party operatives to undertake hostage-taking operations in order to compete with the Hamas for Palestinian hearts and minds and gain the release of major Fatah figures still in Israeli jails. The mass prisoner release, which included some Fatah members and a handful of Israeli Arabs, has significantly weakened the Palestinian "peace camp.”

One Hamas supporter, "Abdullah," interviewed in Ramallah by Avi Issacharov of the Israeli daily Haaretz, put it this way: "This [i.e., Palestine] is Muslim land. The Jews came from abroad, so they can live here as citizens under a Muslim state. . . . The future is Islam's. In all the Arab countries, and now also in the West, this is understood, and the first place in which Islam is resurgent is Palestine." "The people want another Shalit,” was a slogan chanted by the crowds both in Ramallah and Gaza.

But from the Arab side there also emerged one note providing grounds for optimism. The oldest of the released prisoners was 82-year-old Sami Yunes from Arara village in northern Israel. In 1980, he helped murder an Israeli soldier. He told the crowd that greeted him as he arrived home: "Since the Oslo [peace] process [of the 1990s] I have become a soldier for peace. Sixty years of bloodshed is enough. For our children's sake, the only solution is peace."

Don't hold your breath

Beijing caught in debt dilemma

By Willy Lam

Given that China is expected to contribute 24% of world growth this year, the fast-rising quasi-superpower is generally deemed a bastion of stability in the financial maelstrom that is hitting Europe and the United States.

While Beijing, which is the largest holder of US debt, has yet to make substantial purchases of the European bonds, it has expressed a theoretical willingness to help embattled European Union countries. One of the goals of the latest session of the Chinese Communist Party's (CCP) Central Committee (which concluded on October 18) was to project Chinese soft power by playing up the viability of the "China model".

Confidence in Beijing's ability to manage China's finances however has been shaken by a series of bad news about the nation's private enterprises and its labyrinthine underground banking system.

Since early summer, thousands of once vibrant small and medium-sized enterprises (SMEs) - which account for more than half of China's gross domestic product (GDP) and which create 80% of its jobs - have gone under. In Wenzhou, Zhejiang province, the world-famous quasi-capitalist showcase, dozens of "red bosses" simply vanished last month without paying either their creditors or their employees.

Wenzhou officials have increased visits to factories that appear to be in trouble with a view to forestalling mass layoffs should these firms fail. In the first seven months of the year, Wenzhou enterprises recorded losses of 640 million yuan (US$100 million), or 220 million yuan more than 2010.

While China's private bosses are known for being savvy and resilient, many have turned from manufacturing - where labor and material costs are rising dramatically - to the much more lucrative business of speculating in the real estate market. The downturn in property and related sectors however means some of the most successful SMEs have gone bust.

The so-called Wenzhou phenomenon is being duplicated elsewhere, including several cities in prosperous Guangdong province.

The financial disruptions hitting private firms is linked closely with the country's gargantuan "underground banks". These unlicensed lenders range from local-based businessmen's cooperatives and brokers to credit and trust companies that are offshoots of official banks, insurance companies and other financial institutions.

While illegal on paper, underground banks have been tolerated by the authorities for more than a decade. Even though China has given so-called "national treatment" to quite a number of foreign enterprises and joint-ventures, non-state firms routinely face discrimination from creditors.

Most government-controlled banks, including the "Big Four" - Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agriculture Bank of China - prefer to do business with large state-owned enterprises (SOEs). Non-state companies, particularly SMEs, have for the past decade or so been forced to borrow from underground financial institutions. This is despite the fact that interest rates have been between 30% to 100% during the past year.

Since Beijing tightened the official banks' credit to the real-estate sector early this year, underground banks have also become the prime financier to property developers. The shadow bankers have lent 208 billion yuan to real-estate companies so far this year, or nearly as much as the 211 billion yuan worth of loans that official banks have extended to the sector.

Estimates of the total size of China's underground lending range from 4 trillion yuan to 8 trillion yuan, or respectively around 8% to 16% of the official credit market. It is obvious that a sudden downturn in the economy - such as a bursting of the housing bubble and domino-style defaults by borrowers - could wreak havoc on this shady banking industry.

Complicating the problem is the fact that many of the shadow financial institutions are so-called trust companies that are either directly or indirectly connected with either official banks or government-controlled business conglomerates. They have lured depositors by promising interest rates at least a few times higher than the meager 3.5% or so offered by official banks.

Depositors have included SOEs as well as ordinary citizens, who have been transferring money from their saving accounts in official banks to underground ones. This partly explained the fact that deposits in the Big Four banks suddenly shrank by 420 billion yuan in the first half of September.

The extent of ordinary folks' participation in the shadow banking sector is evidenced by the fact that 90% of Wenzhou residents have parked their money into these institutions. These underground lenders also are proving popular with depositors in neighboring Guangdong province.

Apart from giving loans to parties that have problem securing credit from government banks, trust companies and other underground financial institutions have repackaged and "securitized" their loans into asset-based securities and other wealth management products (WMP) that are similar to those dubious bonds and financial products that flooded the United States in the run-up to the sub-prime mortgage crisis in late 2008.

The Chinese media have reported that commercial lenders issued 8.51 trillion yuan worth of WMPs in the first six months of this year, compared to about 7.05 trillion yuan for the whole of 2010. The value of WMPs could shrink drastically at a time of economic fluctuations, leaving their investors with little compensation.

Meanwhile, the problem of bad loans being piled up by the nation's close to 10,000 local-government financial vehicles (LGFV) remains unresolved. These semi-governmental institutions were set up by municipal- and grassroots-level administrations in 2008 and 2009 mainly to raise money for property and infrastructure development.

The National Auditing Office estimated the LGFVs had amassed 10.7 trillion yuan of debt by the end of 2010. Yet independent estimates put the figure around 14 trillion yuan. While the government anticipates that 2.5 trillion yuan to 3 trillion yuan of these debts will turn sour, while at least one Western analysis reckons that as much as 8 trillion yuan to 9 trillion yuan will not be repaid.

A recent edition of the official Liaoning Daily said close to 85% of LGFV-related loans in northeast Liaoning province missed debt service payments in 2010.

Economist Cheng Siwei, who is a former vice chairman of the National People's Congress, recently expressed worries about a mammoth debt crisis. "Our version of the US sub-prime crisis is the lending to local governments, which is causing defaults," Cheng said at the World Economic Forum in Dalian last summer.

Owing to the unmitigated spate of bad news on the finance front, it is not surprising that the stock prices of even the "Big Four" banks have tumbled by more than 30% since the summer. It is however premature to conclude the country is about to be plunged into a recession. While independent analysts estimate China's total public debt is about 80% of GDP, central authorities still have a huge war chest. Central revenue was 8.3 trillion yuan last year. The country also holds more than $3.2 trillion in foreign-exchange reserves.

The central government's apparent failure to take timely and efficacious action to combat the series of abuses however is a grave cause for concern. For example, despite repeated pledges by Premier Wen and Executive Vice Premier Li Keqiang about "rectifying dislocations" in the economy, very little has been done to curb the excesses of the underground banks or the LGFVs.

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC) - which is the top watchdog of the banking industry - recently told the People's Daily that banks must "step up their prevention of risks associated with shadow banking".

"The CBRC will strictly examine all financing products promoted by commercial banks to ensure that risk from these products will not extend into the banking system," Liu said. He also expressed confidence that debts incurred by LGFVs would not get out of hand.

At a CBRC meeting earlier this year, Liu told bankers to "boost their investigation and research of the question of shadow banks, and to do well the task of following up [cases] and analysis". No decisive action however has yet been taken by either the CBRC or other government department to close down underground banks, trust companies or LGFVs.

After news of the massive defaults of Wenzhou enterprises hit the newsstands earlier this month, Premier Wen rushed to the city to give at least rhetorical support to the country's struggling private sector.

"Small enterprises should be a priority of bank credit support, and they should enjoy more tax preferences from the government," said Wen. "Banks should increase their tolerance of the non-performing loan ratio of small enterprises, set targets for the expansion of loans to small companies, and reduce the small businesses' cost of securing credit."

Given that it is a stated central-government policy to restrict lending - and to allow major commercial banks to give preference to SOEs in their credit policy - it is, however, unlikely Wen's promises will materialize.

The central government is facing a tough dilemma. On the one hand, Beijing is unlikely to change its year-long policy of reining in credit so as to curb inflation - as well as excessive exuberance in the housing and other sectors. Last August, the consumer price index was 6.2%, slightly down from the three-year high rate of 6.5% recorded for July.

Both officials and economists however have warned upward price spirals will continue for a relatively long period. On the other hand, the massive closure of SMEs means unemployment - and social unrest.

Equally importantly, Beijing must do more to curtail reckless lending as well as the sale of WMPs in the shadow banking market. A massive failing of underground banks could lead to potentially violent protests by its tens of millions of depositors. China already suffers from more than 100,000 mass disturbances each year.

Given that the 18th CCP Congress, which will witness a wholesale changing of the leadership, is just a year away, the current administration faces mounting pressure to clean up the country's financial mess sooner rather than later.

A giant Somalia

Mogadishu on the Mediterranean?

 

Muammar al-Qaddafi is dead. Now comes the hard part -- preventing Libya from turning into another Somalia.

BY CHRISTIAN CARYL

While fireworks light up the skies of Tripoli and Libyans dance in the street, a note of caution is now in order. Simply removing a dictator is not an automatic cure-all for a society long terrorized. Yes, toppling a tyrant can pave the way toward viable democracy; and there are many examples -- from Chile to the Philippines.

But there are also less inspiring ones. In 1991, the man who had ruled Somalia in brutal style for 22 years -- Mohammed Siad Barre -- fell from power. He died four years later in exile in Kenya, by then completely irrelevant to the fate of his country.

Somalis took little consolation in his departure. The collapse of Barre's highly personalized tyranny gave way to a power vacuum that continues to this day. Long-suppressed rivalries of clan and tribe broke into the open and tore the place apart.

Mogadishu is a good distance from Tripoli, of course. But that hasn't stopped some people from worrying about possible parallels. "One of our biggest concerns is Libya descending into chaos and becoming a giant Somalia," Secretary of State Hillary Clinton told the U.S. Senate Foreign Relations Committee back in early March -- a note struck by Director of National Intelligence James Clapper in his own Capitol Hill testimony a few days later, when he worried aloud about a "Somalia-like situation" ensuing in place of Qaddafi's rule.

It is understandable why the comparison presents itself. Libya has existed as a modern, unified state only since 1951. Tribal divisions persist. (The defection early in the rebellion of the one-million-strong Warfalla tribe, a mainstay of the old regime, was viewed as a near-fatal blow to Qaddafi; its members now play a prominent role in the opposition.) The rebellion against Qaddafi's rule has been very much a localized and fragmented affair, breeding a new class of powerful militia commanders like Abd al-Hakim Belhaj, the ex-Islamist leader who led the assault on Qaddafi's Tripoli compound in August, or Fawzi Bukatif, who publicly refused to integrate his powerful February 17 Brigade  into a national army.

The members of the National Transitional Council (NTC), Libya's government-in-waiting, have been saying for months that the war against Qaddafi had to be completely won before there the country could move on to the difficult task of building a new one, based on democratic norms.

"Now the clock starts ticking," says Stanford political science professor James Fearon. And this is where it gets tricky. Libya's new leaders no longer have their hatred of Qaddafi to unify them; from here on out they'll have to focus on building solid political institutions that can resolve the tensions within society.

Fearon, whose work has focused on revolutions and civil wars around the world, says that one key question is what happens with the men who control the guns: "How do you incorporate them into the new political structure?" Control of Libya's vast oil wealth is also likely to prove a thorny issue, he notes.

Vincent Cornell, a Libya expert at Emory University, says that observers make too much of the tribal factor. Qaddafi's 42-year rule, he says, rubbed most of the sharp edges off tribal divisions. "I'm actually more hopeful about Libya than Egypt," he says, noting that much of the political systems created by ex-President Hosni Mubarak appear to have survived his removal from power. In Libya, by contrast, the end of Qaddafi's highly personalized style of rule means that the revolutionaries have the chance to "start from scratch." Many members of the NTC, he says, are "moderates" -- quite a few of them Western-educated -- who know that they have to transcend old schisms if they are to make a go of the new state.

That, of course, is easier said than done. Manal Omar, of the United States Institute of Peace, has spent considerable time on the ground with the rebels this year, and she says that she's been encouraged by their ability to unite. Tribal divides are still potent, but she points out that the Libyan opposition has so far demonstrated a considerable willingness to overcome them. The best example came when rebel commander Abdul Fatah Younes was assassinated in July under mysterious circumstances. Leaders of his tribe managed to restrain their followers from violence after the NTC promised a "detailed criminal investigation" into the affair. (There has been talk that they made some sort of deal with the tribes, but the details remain obscure.) "Libyans are clearly demanding the rule of law," she says.

Yet Omar points out that the NTC never actually delivered on that promise of an investigation, an omission that has ominous implications. She worries that the NTC isn't taking the tribal factor into sufficient account. The old divisions can re-assert themselves with a vengeance, she says, if people have the sense that the central authorities aren't willing to look out for their interests. "If [the NTC members] continue to marginalize the tribes by not responding to them, they could force them into a political role."

That's also why, Omar says, the NTC must deliver on its oft-repeated promise to cede its leading role to a more representative government. NTC Chairman Mahmoud Jibril has promised to step down following the liberation of the country, which is to be announced within the next few days.  "As long as they don't see delays, people will be ready to cooperate," says Omar. She also urges Libya's leaders to consult civil society groups -- including women and young people -- in every stage of the state-building process that's to come. There are sure to be plenty of bumps along the way.

Nothing is predestined. No scenario is inevitable. There's no question that Qaddafi's demise opens up countless opportunities for Libyans to proceed along the path of determining their own future. But openness also brings risks. Qaddafi's son, Saif al-Islam, once warned Europe that Libya would turn into a Somalia on the Mediterranean if European forces didn't come to the regime's aid. That hasn't happened yet, but it still could.