What caused sub-prime, and how to fix it

It is apparent now that more government regulation was necessary of the mortgage lending industry.  This bailout is going to cost more than the Iraq war to-date, over $700 Billion!  We can't afford this disaster, let alone a repeat of it.  Obama was right, the U.S. government must regulate any and all financial institutions that act like banks, even if they are not technically banks.  It's past time that gov't regulation caught up to financial market "innovation."


7 Deadly Sins of Deregulation -- And 3 Necessary Reforms
By Robert Kuttner
September 17, 2008  |  Prospect.org

The current carnage on Wall Street, with dire spillover effects on Main Street, is the result of a failed ideology -- the idea that financial markets could regulate themselves. Serial deregulation fed on itself. Deliberate repeal of regulations became entangled with failure to carry out laws still on the books. Corruption mingled with simple incompetence. And though the ideology was largely Republican, it was abetted by Wall Street Democrats.

Why regulate? As we have seen ever since the sub-prime market blew up in the summer of 2007, government cannot stand by when a financial crash threatens to turn into a general depression -- even a government like the Bush administration that fervently believes in free markets. But if government must act to contain wider damage when large banks fail, then it is obliged to act to prevent damage from occurring in the first place. Otherwise, the result is what economists term "moral hazard"-- an invitation to take excessive risks.

Government, under Franklin Roosevelt, got serious about regulating financial markets after the first cycle of financial bubble and economic ruin in the 1920s. Then, as now, the abuses were complex in their detail but very simple in their essence. They included the sale of complex securities packaged in deceptive and misleading ways; far too much borrowing to finance speculative investments; and gross conflicts of interest on the part of insiders who stood to profit from flim-flams. When the speculative bubble burst in 1929, sellers overwhelmed buyers, many investors were wiped out, and the system of credit contracted, choking the rest of the economy.

In the 1930s, the Roosevelt administration acted to prevent a repetition of the ruinous 1920s. Commercial banks were separated from investment banks, so that bankers could not prosper by underwriting bogus securities and foisting them on retail customers. Leverage was limited in order to rein in speculation with borrowed money. Investment banks, stock exchanges, and companies that publicly traded stocks were required to disclose more information to investors. Pyramid schemes and conflicts of interest were limited. The system worked very nicely until the 1970s -- when financial innovators devised end-runs around the regulated system, and regulators stopped keeping up with them.

Seven Deadly Sins

Sin One: Allowing Mortgage Lending to Become a Casino. Until 1969, Fannie Mae was part of the government. Mortgage lenders were tightly regulated. Homeownership rates soared throughout the postwar era, from about 44 percent on the eve of World War II to 64 percent by the mid-1960s. Nobody in the mortgage business got filthy rich, and hardly anyone lost money. Fannie's job was to buy mortgages from banks and thrift institutions, to replenish their money to make mortgages, and along the way to set standards. Fannie financed its operations by selling bonds. In the late 1970s, private Wall Street firms started emulating Fannie. They packaged mortgages, and converted them into bonds. Over time, their standards deteriorated, because they could make more money creating riskier products. In order to avoid losing market share, Fannie emulated some of the same abuses. Government did not step in to regulate the affair -- which was a time bomb waiting for the creation of the sub-prime mortgage business.

Sin Two: Allowing Unregulated Bond Rating Agencies to Decide What was Safe. Sub-prime is only the best known of a widespread fad known as "securitization." The idea is to turn loans into bonds. Bonds are given ratings by private companies that have official government recognition, such as Moody's and Standard and Poors, but no government regulation. These rating agencies have become thoroughly corrupted by conflicts of interest. If you want to package and sell bonds backed by risky loans, you go to a bond-rating agency and pay it a hefty fee. In return, the agency helps you manipulate the bond so that it qualifies for a triple-A rating, even if the underlying loans include many that are high-risk. Without the collusion of the bond-rating agencies, sub-prime lending never would have gotten off the ground, because it would not have found a mass market. Had regulators looked inside this black box, they would have shut it down. They might have needed new legislation, but they never asked for it. And public-minded regulators might have done a lot under existing law, since banks (which are regulated) were heavily implicated in the financing of sub-prime.

Sin Three: Failing to Police Sub-prime. The core idea of bank regulation is that government inspectors periodically examine the quality of bank assets. If too large a portion of a bank's loan portfolio is behind in its interest payments, the bank is made to raise more capital as a cushion against losses. Problems are nipped in the bud. But complex securities require more sophisticated regulation than simple loans. Regulators basically waived the rule on adequate capital for the new wave of mortgage lenders who created sub-prime. Many mortgage companies were not banks. They made loans only to sell them off to the Wall Street sinners of Deadly Sin No. 1 (see above). So there was no loan portfolio to examine, and no real capital. The Democratic Congress anticipated this problem in 1994, when it passed the Homeownership Opportunity and Equity Protection Act. This prescient law required the Federal Reserve to regulate the loan-origination standards of mortgage companies that were not otherwise government-regulated. But Alan Greenspan, a free-market zealot, never implemented the law. And when Republicans took over Congress in 1995, they never called him on the carpet.

Sin Four: Failure to Stop Excess Leverage. The financial economy is crashing today because so much speculation was done with borrowed money. A typical leverage ratio of a hedge fund or private equity company is 30 to one. That means $30 of debt for $1 of actual capital. If you make one serious miscalculation, you are out of business. And in the case of sub-prime mortgage companies, the leverage ratio was infinite, because they had no capital. The game was entirely based on creating debt. As long as times were good, financial firms could keep borrowing to finance their deals. But once investors looked down, they panicked. Some parts of the system are unregulated, such as hedge funds and private-equity companies. But they all ultimately get a lot of their funding from banks. And regulators do retain the power to look closely at banks' books (see Sin No.3 above). Had they used that power to police the kind of highly risky stuff banks were underwriting, they could have shut it down.

Sin Five: Failure to Police Conflicts of Interest. Remember the accounting scandals of the 1990s? In those scandals, accounting firms were paid once to audit corporate books and then again to help clients cook the books and still pass muster with the audit. That was a sheer conflict of interest. Though accountants were (loosely) regulated, Congress did not crack down until cooked books caused the stock market to crash. A second conflict of interest was the corruption of stock analysts, who were telling customers to buy dubious stocks because their bosses were profiting from underwriting the same stocks. In the aftermath of the dot-com bust, Congress narrowly cracked down on these two abuses with the Sarbanes-Oxley Act but simply ignored others -- such as the role of bond-rating agencies and the habit of basing executive bonuses on stock prices that could easily be manipulated by the same executives.

Sin Six: Failing to Regulate Hedge Funds and Private Equity. When Roosevelt's New Deal acted to rein in the abuses in financial markets, it regulated the major players -- commercial banks, investment banks, stock brokers, holding companies, and stock exchanges. But two of the biggest purveyors of risk today -- hedge funds and private-equity firms -- simply did not exist. Today, private-equity firms and hedge funds do most of the things banks and investment banks do. They basically create credit by making markets in exotic securities. They buy and sell firms. They speculate in financial markets with borrowed money, taking much bigger risks than regulated banks. According to House Banking Committee Chair Barney Frank, more than half the credit created in recent years has been created by essentially unregulated institutions. The people in charge of the government -- conservative Republicans -- took the view that these new-wave financial players offered transactions between consenting adults who needed no special consumer protection. But they were oblivious to the risks to the larger system.

Sin Seven: Repeal of the Glass-Steagall Act. This action, in 1999, was one of two major cases when a cornerstone of New Deal regulation was explicitly repealed. (The other was the repeal of the Public Utility Holding Company Act, and if your utility rates are sky-high, you can thank Congress for that, too.) Glass-Steagall provided that if you wanted to speculate as an investment bank, good luck to you. But commercial banks were part of the banking system. They created credit. They were regulated, supervised, usually enjoyed FDIC insurance, and had access to advances from the Fed in emergencies. So commercial banks and investment banks were two different creatures that should stay out of each other's knitting.

But beginning in the 1980s, regulators who didn't believe in regulation either allowed explicit waivers of some aspects of Glass-Steagall or looked the other way as commercial banks and investment banks became more alike. By 1999, when Citigroup had jumped the gun and assembled a supermarket that included a commercial bank, investment bank, stock brokerage, and insurance company, Glass Steagall was so hollowed out that it was effectively dead. The coup de grace was its official repeal, in the Gramm-Leach-Bliley Act. That's Gramm as in former Sen. Phil Gramm, a deregulation zealot and top adviser to John McCain.

Three Basic Reforms

What all of these sins had in common was that they led financial markets to misprice assets. In plain English, that means buyers were purchasing securities based on bad information, often with borrowed money. When firms started losing money on sub-prime in mid-2007 and other owners decided it was time to get their money out, the whole miracle of leverage went into reverse. And it spilled over into other securities that had been mispriced thanks to all the conflicts of interest tolerated by regulators.

That's why, no matter how much taxpayer money the Federal Reserve and the Treasury keep pumping in, they can't turn dross back into gold. The next administration and the Congress need to return the financial economy to its historic task of supplying capital to the real economy -- of connecting investors to entrepreneurs -- and shut down the purely casino aspects of the system that have only enriched middlemen and passed along huge risks to everyone else.

Reform One: If it Quacks Like a Bank, Regulate it Like a Bank.  Barack Obama said it well in his historic speech on the financial emergency last March 27 in New York. "We need to regulate financial institutions for what they do, not what they are."  Increasingly, different kinds of financial firms do the same kinds of things, and they are all capable of infusing toxic products into the nation's financial bloodstream. That's why Treasury Secretary Hank Paulson has had to extend the government's financial safety net to all kinds of large financial firms like A.I.G. that have no technical right to the aid and no regulation to keep them from taking outlandish risks. Going forward, all financial firms that buy and sell products in money markets need the same regulation and examination. That will be the essence of the 2009 version of the Glass-Steagall Act.

Reform Two: Limit Leverage. At the very heart of the financial meltdown was extreme speculation with esoteric financial securities, using astronomical rates of leverage. Commercial banks are limited to something like 10 to one, or less, depending on their conditions. These leverage limits need to be extended to all financial players, as part of the same 2009 banking reform.

Reform Three: Police Conflicts of Interest. The conflicts of interest at the core of bond-raising agencies are only one of the conflicts that have been permitted to pervade financial markets. Bond-rating agencies should probably become public institutions. Other conflicts of interest should be made explicitly illegal. Yes, financial markets keep "innovating." But some innovations are good, and some are abusive subterfuges. And if regulators who actually believe in regulation are empowered to examine all financial institutions, they can issue cease-and-desist orders when they encounter dangerous conflicts.

We're talking about a Roosevelt-scale counterrevolution here. But nothing less will prevent the financial collapse from cascading into Great Depression II. And the public should never again forget that this needless collapse was brought to us by free-market extremists.

Ignored by Lib'rul Media: Iraq PM endorsed Obama's withdrawal plan

Here it is: Our big chance to support Iraqi democracy, by giving the Iraqi people and their government what they want.  Wait, what's that you say?  That doesn't matter?  Our occupation of Iraq is not about establishing democracy after all?

Obama's Foreign Policy Advantage           

Matthew Yglesias

September 18, 2008 | Prospect.org

           

A funny thing happened on the morning of July 19 -- Prime Minister Nouri al-Maliki of Iraq endorsed Barack Obama's plan for a 16-month withdrawal timeline from Iraq in an interview with Der Spiegel magazine. In a stroke, the entire conservative argument on Iraq was demolished. Withdrawal, they'd been telling us, was abject surrender and the abandonment of our Iraqi allies. The conservative counter that this was merely political posturing by Maliki made no sense -- if the reason Maliki was calling for withdrawal was the overwhelming demand for withdrawal on the part of the Iraqi public, that was all the more reason for us to leave. And, of course, looking backward John McCain was (and is) still committed to the idea that, even in retrospect, invading Iraq was a good idea. It looked to me like the election was in the bag. Democrats were going to win the national-security argument, and hence, the election.

 

It hasn't quite gone that way. Indeed, Maliki's stunning and repeated endorsement of the progressive position hasn't really penetrated the narrative of the campaign. And while I'd like to blame the media for this, the truth is the Obama campaign hasn't seriously pushed its arguments about Iraq. Nor have they talked about the fact that on Tuesday, five former secretaries of state, including Republicans like Jim Baker and Colin Powell and even McCain adviser Henry Kissinger, endorsed Obama's position on the need for talks with Iran. Indeed, they've stopped pushing national-security messages altogether.

 

Now, the campaign has its reasons for this. The economy really is a dominant public concern. But I still find it disappointing that these issues have been left off the table.

 

Among other things, it leaves an awful lot of Barack Obama out of the Obama campaign. Obama is a candidate who, rather plainly, could never have secured the Democratic nomination without national-security issues. Indeed, it seems extremely unlikely that he would have had an opening to run against Hillary Clinton in the first place if not for her catastrophic misjudgment in backing the invasion of Iraq in 2002. Beyond that, some of his finest moments in the primary campaign were linked to foreign policy -- from his refusal to back down from his controversial-but-correct stance in favor of high-level talks with Iran to Samantha Power's brilliant denunciation of the "bankrupt conventional wisdom" that's led our country astray.

 

And beyond that, it leaves most of what we really know about John McCain. Not only has McCain, by his own admission, made military and national-security issues the primary focus of his career but anyone who's being honest will tell you that nobody has the foggiest clue what domestic policy would actually look like in a McCain administration. We can, to be sure, evaluate his campaign's policy proposals: They mostly stink. But if elected, he'll face expanded Democratic majorities in Congress who are unlikely to go along with these proposals. What happens then is in the realm of pure conjecture. McCain's been all over the map and then back again, ideologically, on domestic issues and seems prone to capricious decision-making. Faced with congressional resistance would he compromise? Dig in his heels and fight? Nobody really knows.

 

Foreign policy isn't like that. Congress has, in practice, few tools with which to constrain presidential war-making powers. And McCain is passionate about his ideas on this score and will surely resist any congressional efforts to restrain him quite vigorously. What's more, his ideas on this subject are extremely unsound. Jeffrey Goldberg, who is sympathetic to the McCain approach to national security, observes in a recent profile that "in one area, though, he has been more or less constant: his belief in the power of war to solve otherwise insoluble problems."

 

Pocketbook concerns are always dear to the electorate, but it would be nice for voters to give some consideration to the question of whether the right lesson to learn from the Bush years is that we need a president who believes strongly in the power of war to solve problems. Indeed, it seems telling that neither Condoleezza Rice nor Colin Powell can bring themselves to endorse McCain.

 

Their indecision reflects the larger state of U.S. foreign policy. Around when Robert Gates was appointed to run the Pentagon, the Bush administration's proclivity for neoconnish hubris was checked in favor of something more pragmatic. But mere pragmatism has been unable to accomplish much in light of the disasters of the previous years. But Bush has been unwilling to take the sort of dramatic steps -- a diplomatic breakthrough with Iran, reinvigoration of the multilateral nonproliferation process, a new worldwide treaty on climate change -- that could right the course. As a result, we've been drifting: no new disasters, but no solutions either. In this regard, McCain wouldn't offer four more years of the same thing; he'd offer a return to the kind of approach that Bush himself eventually abandoned as unworkable. Obama, meanwhile, offers the sort of bold new approach that could break the impasse. Or, rather, he did back when he talked about national-security policy.

 

Both campaigns have their reasons for downplaying foreign-policy debates, and it's at least defensible for the press to follow the candidates' lead in this regard. Still, it's disturbing to realize that one of the starkest choices ever offered on national-security policy seems likely, barring a sudden and happy end to the financial crisis gripping the country, to go almost entirely undiscussed during the portion of the campaign season when voters are actually paying attention.

Re: What do Republicans really want?

Based on the Republicans I listen and talk to, a large proportion don't really go in for most of the GOP platform. They just don't want to pay taxes. It's really that simple. They latch onto lots of other reasons not to like Obama, like his pastor or whatever, but in the final analysis, they're just afraid he'll raise their taxes. That's the main reason they're Republicans. It's not about fiscal conservatism, i.e. running a balanced budget. Reagan and Dubya ballooned our national debt, and they didn't care. They don't care about the price their kids and grandkids will pay tomorrow; just don't take their money today.

It's not about freedom either. People who assert their freedom to do this or that are probably doing something they shouldn't be doing anyway, thinks a Republican, like protesting, having too much strange sex, doing drugs, or spouting radical opinions. (Guns are not included; simply owning guns is a good for everybody's freedom). Since the '60s, Republicans have been less concerned about protecting civil liberties and the 1st Amendment, because they think only radicals require these protections. The fracas over the Patriot Act, illegal wiretaps, and G'itmo has further reinforced their belief that only anti-Americans, ACLU-types, and terrorists should fear oppressive government and seek protection under the Bill of Rights.

(The Clinton years, surprise, surprise, were a detour from this general thought trend among Republicans, because Clinton was a Democrat. Then we had an explosion in the number of paranoid militias drilling in the woods; popular conspiracy theories about the "New World Order" and black UN helicopters zipping through U.S. airspace with impunity, preparing for their invasion; Al Gore planned to spy on every American's computer via "total information awareness;" Janet Reno's FBI were "jackbooted thugs" who picked on poor Randy Weaver and those devout Branch Davidians; Clinton sold nuclear secrets to the Chinese in exchange for campaign cash; Vince Foster's "murder" in the White House was made to look like a suicide by the FBI; Ron Brown's plane was "blown up" because he knew too much; and "dozens" of others were "murdered" by the Clinton "Death Squad." I remember all this stuff because I used to believe it; I listened to Rush and G. Gordon Liddy and had a subscription to National Review. It's no coincidence the X-Files were so popular in the Clinton-era 90s; but hardly anybody cares about evil government conspiracies now that a dumb, born-again, two-fisted Republican is in the White House, protecting us from "evildoers.")

Many other Republicans still fear "creeping socialism" courtesy of the Democratic party. They never really got out of that frame of mind from the Cold War, that America -- particularly the GOP -- is the last bulwark against worldwide socialism. They see Obama as the slick, silver-tongued salesmen who will hoodwink Americans into accepting European-style, godless social democracy. Nothing could be worse, it goes without saying.

On Mon, Sep 15, 2008 at 5:53 PM, < > wrote:

Yes, they clearly want it more badly than we do, but what do they actually want?

That's what I don't get. The tenets of republicanism used to mean things like smaller government, more individual freedom, responsible spending, oneman onevote, almost libertarian in its antipathy to big government.

Now, with these bail-outs, which will cripple that once-sacred cow of republicanism, the american taxpayer, and gas prices through the roof, the housing market in crisis, all because special corporate interests have been setting the policy agenda in this country for the last 30 years, you'd think these self-styled individual-freedom lovers would be up in arms, but no, they'd rather go down with the sinking ship.

I don't even get it anymore. Or rather, I do get it, but it's too depressing to accept. The bottom line is, the American electorate is as rabidly stupid and desperate for "strong" leadership as Mussolini's Italy, Stalin's Russia, Hitler's Germany, and Mao's China.

I mean, why should our population base be immune to psychological weaknesses inherent in every massive population base throughout history? America's not special, and American's are just as vulnerable to being manipulated by rotten scumbags as any other nationality. Our history is supposed to provide us with a kind of immunity, but ever since the Reaganites came into their own, America's been steadily dumbed down, raised like so much intellectual veal.

It's so sad.

Re: The real reasons behind improvement in Iraq

Too bad Robinson doesn't include herself among the "grown-ups" who need to discuss this decision; she ends the op-ed without giving any concrete advice, despite her extensive 10 months of experience in Iraq.  She does advocate some number of troops between 0 and 100,000 to remain in Iraq, for some unspecified period of time.  Wow, brilliant.  That's just the kind of "risk nothing" policy prescription that lands you a comfortable fellowship at conservative Johns Hopkins U. 

Sounds to me like the Sunnis and Maliki did things that were in their interest: The Sunnis gladly took U.S. cash in exchange for rooting out al Qaeda (which they would have done anyway); and Prime Minister Maliki gladly borrowed U.S. muscle to help cow his rival, Moqtada al-Sadr and his Mahdi army (whom he would have had to take on anyway).  We couldn't really "take advantage" of the competition between Maliki and Sadr, because Maliki knew that we wouldn't support Sadr, what with his close ties to Iran.  So Maliki was our only alternative, and he knew it.  That's not "competition" or playing both sides off one another, as Robinson claims, that's just plain choosing sides (Maliki's) in an internecine power struggle.  Let's hope Maliki was worth it.

That said, bribing people who can be bribed is SOP in counter-insurgency warfare.  It's cheaper and less bloody than killing them.  Again, let's hope we bribed the right people, and that they'll stay bought and not to shoot us in the back as we leave.

Finally, just because Petraeus and the U.S. army were proximate to these events, doesn't mean that they caused them.  I sense in Robinson another journalistic victim of "Embed Syndrome," who got starstruck by all her access to Petraeus himself.   

The upshot of this op-ed is just what every Administration mouthpiece has been saying for the past 5 years: Stay the course in Iraq, for some unknown period of time, at some undefined level of troops.  McCain couldn't have put it any better himself. 

---------- Forwarded message ----------
From:
Date: Sun, Sep 14, 2008 at 2:46 PM
Subject: Fw: the first disastrous steps taken by the U.S. occupation authority led by L. Paul Bremer -- disbanding Saddam Hussein's Baath Party and the old regime's security services -- had helped create the Sunni insurgency.
To:

 

 

How Petraeus Changed the Course in Iraq

 

By Linda Robinson

September 14, 2008 | Washington Post

 

Iraq still divides Democrats and Republicans like no other issue, as the campaign rhetoric of both parties makes abundantly clear. Liberals and conservatives can now more or less agree that Iraq is a much, much safer country than it was 18 months ago. But each side is peddling its own story about Iraq's extraordinary turnaround -- and both are wrong.

 

Many conservatives believe that the 2007 "surge" in U.S. troop levels directly produced the decline in Iraqi violence. Meanwhile, liberals argue that Iraq's warring Shiites and Sunnis spontaneously decided -- for their own internal reasons, unrelated to the surge -- to stop fighting. As is so often true of Washington debates, these arguments bear little relation to the reality of how Iraq actually pulled out of its death spiral, which is far more interesting than either partisan yarn. There was no single silver bullet, but rather a multifaceted strategy crafted and carried out by those in Baghdad -- not, despite recent claims, in Washington.

 

I came to this conclusion after reporting in Iraq for a total of 10 months since 2003 and after extensive interviews with Iraqi and U.S. leaders, as well as with troops in the most violent neighborhoods of greater Baghdad, the epicenter of the conflict. My biggest question was my simplest: How did Gen. David H. Petraeus do it?

 

My answer? Bottom line, for the first time since the war began, a U.S. leader decided to address the political motivations of the Iraqi combatants. Petraeus convened a study group that shrewdly analyzed the raging sectarian conflict, then came up with what he called "the Anaconda strategy" to address the underlying dynamic.

 

 

Petraeus and his diplomatic partner, Ambassador Ryan Crocker, realized that the first disastrous steps taken by the U.S. occupation authority led by L. Paul Bremer -- disbanding Saddam Hussein's Baath Party and the old regime's security services -- had helped create the Sunni insurgency. They produced a critical mass of angry men worried that the Sunnis who had run the old Iraq would wind up on the bottom in the new one. Those fears were soon realized: Bremer's occupation government pushed for a sequence of poorly planned elections that wound up entrenching the power of a Shiite-dominated coalition, which began a "sectarian cleansing" campaign against Iraq's minority Sunnis -- and tilted the country into a full-on civil war.

 

While policymakers back in Washington continued to be duped by sectarian-minded Shiite politicians, Petraeus and Crocker set about using all available levers -- including thinking about Iraqi politics -- to rectify the earlier, catastrophic U.S. blunders.

 

The extra surge brigades certainly helped, but the number of U.S. troops was far less important than the new ways in which they were used. The most important new tactical move still gets scant Beltway attention: Petraeus's initiative to reach out to the Sunni insurgency and its base. "We cannot kill our way to victory," he said.

 

On June 2, 2007, Petraeus gathered his commanders and told them to engage with influential Sunnis and insurgents and persuade them to stop fighting. "Tribal engagement and local reconciliation work!" he said. "Encourage it!"

 

The policy was carried out on the battalion level, using troops deployed in U.S. outposts and in joint security stations alongside freshly trained Iraqi forces. "Don't let our bureaucracy stop you, and don't let the Iraqi government stop you," Petraeus urged his young lieutenant colonels, whom he often invited to join him for five-mile fitness -- and advice-dispensing -- runs around Camp Victory, the main U.S. base.

 

He was right to turn to his battalion commanders. Baghdad was being engulfed in growing mayhem: ever-larger car bombs, lethal copper projectiles, homemade explosives packed into sewer pipes that burned U.S. soldiers alive. But the U.S. troops persisted. Over the summer of 2007, the Sunnis responded en masse to the new approach: By September, according to U.S. officials and my own reporting, 15,000 Sunnis had signed up to become checkpoint guards and neighborhood watchmen, paid and monitored by the U.S. battalions that were being so carefully coached by Petraeus. The Shiite government was not amused; the last thing it wanted was its former Sunni foes back inside the fold. Still, by year's end, 70,000 Sunnis -- comprising the vast majority of the insurgents and their support base -- had joined the new U.S.-backed effort. This policy -- battled by bureaucrats both in Baghdad and inside the Beltway -- changed the tide of the war.

 

As the Sunni insurgents switched sides, they passed vital intelligence to their U.S. partners and paymasters, which enabled Petraeus's forces to target Sunni holdouts, including diehards affiliated with al-Qaeda in Iraq. U.S. soldiers also employed new techniques to control the Iraqi population and provide for its safety and to identify fighters hidden among the civilians. For the first time since the war began in 2003, a shareable, computerized biometric registry of military-age males was created. This led to the detention of fewer innocents and more bad guys. Meanwhile, car bombings fell off dramatically after U.S. forces erected concrete barrier walls along sectarian fault lines, including the markets that had been the scenes of some of the ghastliest atrocities.

 

Why were so many Sunnis -- insurgents and civilians alike -- ready to respond to the U.S. overture? Because they were getting desperate and saw Petraeus's outstretched hand as their best chance of surviving a campaign of sectarian violence and ethnic cleansing led by the Shiites and fueled by neighboring Iran. The secular Sunnis' alliance with the jihadist insurgents had always been an uneasy marriage of convenience, and it broke up when Petraeus made a better offer.

 

Another major change over the past 18 months is also poorly understood: the decision of the Mahdi Army, the radical Shiite militia led by Moqtada al-Sadr, to largely stop fighting. Sadr, a young firebrand Islamist cleric, raised a militia of poor youths to take on U.S. troops, even as he backed his fellow Shiite, Iraqi Prime Minister Nouri al-Maliki, through political channels. Then last August, Sadr abruptly declared a ceasefire.

 

That move has been widely misinterpreted as a spontaneous, unilateral gesture; in fact, it came after months of military and political pressure. Iraqi special operations forces, backed by elite U.S. combat advisers, conducted near-nightly raids against the most extreme elements of the Mahdi Army. In March 2007, according to Petraeus's staff, the special ops units captured Qais Khazali, a member of the radical Lebanese militia Hezbollah and a Sadrist militia leader. Khazali, U.S. military officials said, provided details of extensive Iranian assistance to Khazali's henchmen. This information, together with two assassinations of provincial governors by Sadrist forces, rattled Maliki -- and began to turn him against Sadr, a fellow Shiite who had helped put the prime minister in office.

 

The final straw came on Aug. 27, when Sadr's militiamen attacked guards at the main Shiite shrine in Karbala as a million worshipers arrived in the city to mark a holy day. An apoplectic Maliki rushed to Karbala, and the resulting confrontation led Sadr (then in Iran) to back down and issue his ceasefire declaration. Maliki then launched an offensive in Basra this spring to break Sadrists' control of the city, the port and oil pumping station. The wedge between Maliki and Sadr widened when massive arms caches of recent Iranian manufacture were discovered, despite Iran's 2007 pledge to desist stoking Iraq's nascent civil war.

 

 

That said, the intra-Shiite competition for power will persist for years; the trick is to channel it into politics, not violence -- and to continue to make use of the competition between Maliki and Sadr.

 

Iranian influence in Iraq is also destined to continue, but it's a double-edged sword. Iraqi Shiite groups are wary of appearing to be Iranian puppets, which would hamstring their popularity with Iraqis. Nor do many Iraqi Shiites fancy a Tehran-style theocracy. As Sadr's militia has loosened its control over many Shiite neighborhoods, ordinary Shiites have sighed with relief, glad to be rid of the thuggish behavior and the religious strictures imposed by some militia leaders.

 

Another key factor in Iraq's turnaround has been Petraeus's willingness to use his leverage with Iraqi leaders. Behind closed doors, the U.S. commander has frequently gone to the mat with Maliki as part of a "good cop, bad cop" routine that he and the unflappable Crocker have perfected. The veteran ambassador provided diplomatic sangfroid and insight into the region's historical animosities; Petraeus provided the raw muscle to maneuver the Iraqi government into making concessions.

 

Petraeus waded deeper into the political mire than most other U.S. generals would have. In one of my interviews with him last year, he confessed to me that he had shown the "full range of emotions" and had even feigned anger in order to move Maliki away from sectarianism. On his first tour in Iraq, in Mosul, the general had learned that it was sometimes necessary to bang tables and twist arms.

 

Getting basic services to Sunni areas was one key effort that required constant browbeating. When Petraeus was told that an Iraqi ministry official had refused to visit Dora, one of many Sunni regions still without electricity, trash removal and other basic services, I heard him bark, "Tell him if he wants a blue badge for the Green Zone, he'd better get down here." Petraeus also pushed the Iraqi parliament to pass de-Baathification reforms and other crucial legislation earlier this year. And not least, the general repeatedly bucked pressure from his civilian and military superiors at the Pentagon to declare "Mission Accomplished" before he felt that it was.

 

Petraeus's willingness to grapple with Iraqi politics made all the difference. His replacements' tasks will be more than ever political, not military. The former Sunni insurgency hasn't yet been woven into the political, economic and security life of the country, and the extraordinary success of the past 18 months is likely to unravel if Petraeus's and Crocker's successors -- as well as the next U.S. president -- do not finish that crucial undertaking.

 

No, the Iraqis can't finish the job on their own now; at the same time, no, we don't need 100,000 U.S. troops to stay in Iraq and do it for them. It would be heartening if we could understand the real record of Iraq's turnaround -- and talk about its future like grown-ups.

 

lrobin43@jhu.edu

Re: Islamofascism

Uncle T,
(Sigh.) OK. Let's have this stupid argument for the 100th time. You ask, "Where are all the moderate Muslims?" and I repeat the same old things.... There are roughly 1.25 billion Muslims in the world, or 19% of earth's population, and 99.9% of them are not committing any violence or supporting violence. Not billions, not millions, not even thousands of Muslims are sending bin Laden and his ilk checks in the mail for support. Al-Qaeda is largely self-financed, with some large donations from oil sheiks whom the U.S. supports.

The fact that our Western media and think-tank hucksters play up all the scares and violence and none of the everyday life and words of regular Muslims is OUR problem, it's OUR short-sightedness, it's not THEIR problem. After all, what efforts have you made lately to show Muslims in Iraq, Iran, or Afghanistan that you're really a peace-loving guy who doesn't hate Muslims, and doesn't want to make a new Crusade against Islam? None. You haven't done anything. So, don't demand more from others than you're willing to do yourself. You see yourself as the aggrieved party after 9/11 who deserves all manner of apologies and assurances, but if you could just get out of your own skin for 2 seconds, then maybe you would see that Muslims have many more reasons to suspect us and YOU of hating them and wanting to oppress and destroy them. Their suspicions are wrong, (I hope), but they have more bases in fact than your fears about them.

Now read this post from today:

Poll: 93% of Muslims Worldwide Condemn 9/11 Attacks - 0% Approve of Attacks on Religious Grounds

I don't deny there is a small number of very dangerous Islamists out there who are beyond redemption, they just want to kill as many Americans as they can. But I must reject gibberish terms that mean nothing, like "Islamofascism." I'm in agreement with Rush Limbaugh that "words mean things," so let's use words properly. Fascism , or at least its historical characteristics in Germany and Italy, has been well defined, and political scientists and historians are in agreement on that. Putting "Islamo-" in front of a very powerful word is useful for scaring people, unifying them, and mobilizing them behind your cause, but it's callous and deceitful. More generally, I'm against Americans alluding to Nazi Germany and WWII every time we face a national challenge, as if we the people lack the ability to see that threats to peace can come in many shapes and sizes, as if we are so dense that we must be given re-packaged notions of things we already understand in order for our child-like minds to understand new ones. In doing so we distort the meaning of the new and the old thing, simultaneously. In short, words like Islamofascism make us dumber.

On Thu, Sep 11, 2008 at 6:49 PM, < > wrote:

However, to deny that Islamofascism exists, on a however small percentage, is again having blinders on. How many times has Osama Bin Laden , and other radical groups, specifically stated that they desire the world to turn 100% to Islamic faith and that military action and violence is justified to accomplish same . It may be a small percentage of the billions of Muslims who adhere to the action of violence to accomplish the conversion of the world to Islam, (and we have had this discussion before,) but where are the billions of so-called moderate rational Muslims who allegedly believe otherwise and why do not the billions of other Muslins not condemn Bin Laden etc and why do the billions of "moderate Muslins" continue to financially support Bin Laden etc so as to keep the violent part of Islam going. To not acknowledge these facts is again a refusal to open your mind.