Offshore News Digest for Week of December 27, 2004

GLOBAL BUSINESS

BERMUDA MONETARY AUTHORITY HEAD DISMISSES FEARS OVER SPITZER INSURANCE PROBE

BMA head Cheryl Ann Lister attempted to reassure the jurisdiction’s insurance and reinsurance industry following remarks made by New York Attorney General, Eliot Spitzer earlier this year. Testifying before the Subcommittee on Financial Management, the Budget and International Security’s oversight hearing on insurance industry practice, Mr. Spitzer drew attention to the outflow of U.S. insurers and captives to offshore centers such as Bermuda, and pledged to investigate the reasons behind the exodus, suggesting that, “There is a Pandora’s box that should be opened so that we can understand what is going on in these offshore venues. It will not be a pretty picture.”

However, Mrs. Lister suggested that, “Bermuda has been the flavor of the day and at the end of the day we have been successful as a jurisdiction getting a very vibrant successful insurance industry here. Bermuda’s name was used but I do not see that the issues relate specifically, that whatever he was discussing are just Bermuda issues. We operate in a global marketplace so if there are any issues that ultimately come out of this they are issues that will affect reinsurers more generally not just the Bermuda ones.” The BMA chief went on to add that in many cases, insurers operating in Bermuda have U.S. operations, and that Mr. Spitzer’s probe may end up focusing on them.

ARGENTINA’S ECONOMIC RALLY DEFIES FORECASTS

When the Argentine economy collapsed in December 2001, doomsday predictions abounded. Unless it adopted orthodox economic policies and quickly cut a deal with its foreign creditors, hyperinflation would surely follow, the peso would become worthless, investment and foreign reserves would vanish and any prospect of growth would be strangled. But three years after Argentina declared a record debt default of more than $100 billion, the largest in history, the apocalypse has not arrived. Instead, the economy has grown by 8% for two consecutive years, exports have zoomed, the currency is stable, investors are gradually returning and unemployment has eased from record highs -- all without a debt settlement or the standard measures required by the I.M.F. for its approval.

Argentina’s recovery has been undeniable, and it has been achieved at least in part by ignoring and even defying economic and political orthodoxy. Rather than moving to immediately satisfy bondholders, private banks and the I.M.F., as other developing countries have done in less severe crises, the Peronist-led government chose to stimulate internal consumption first and told creditors to get in line with everyone else.

The consequences of that decision can be seen in government statistics and in stores, where consumers once again were spending robustly before Christmas. More than two million jobs have been created since the depths of the crisis early in 2002, and according to official figures, inflation-adjusted income has also bounced back, returning almost to the level of the late 1990’s. That is when the crisis emerged, as Argentina sought to tighten its belt according to I.M.F. prescriptions, only to collapse into the worst depression in its history, which also set off a political crisis. Some of the new jobs are from a low-paying government make-work program, but nearly half are in the private sector.

Traditional free-market economists remain skeptical of the government’s approach. While acknowledging there has been a recovery, they attribute it mainly to external factors rather than the policies of President Néstor Kirchner, who has been in office since May 2003. Increasingly, they also maintain that the comeback is beginning to lose steam. “We’ve been lucky,” said Juan Luis Bour, chief economist at the Latin American Foundation for Economic Research here. “We’ve had high prices for commodities and low interest rates. But if we want to grow in 2005, we’re going to have to settle the debt question and have foreign capital come in.”

The I.M.F., which Argentine officials blame for inducing the crisis in the first place, argues that the current government is acting at least in part as the I.M.F. has always recommended. It has limited spending and moved to increase revenues, a classic prescription when an economy is ailing, and has built up a surplus twice the size of what the fund had asked before negotiations were put on hold several months ago.

ONCE A BACKWATER, SLOVAKIA SURGES

Legions of investors are, analysts say, turning Slovakia into one of the fastest-growing economies in Central Europe. An economic backwater in the late 1990’s, Slovakia has lately been dubbed the Tatra Tiger -- Tatra from the mountain range here and tiger after the Irish Tiger, the term used to describe Ireland’s economic transformation in the 1990’s. There are many similarities: both Ireland and Slovakia are small (Ireland’s population is 4 million, Slovakia’s 5.5 million). Both were traditionally reliant on agriculture, and even their quintessential foods, cabbage and potatoes, are the same. Both joined the E.U. (Slovakia last spring) with relatively underdeveloped economies. As Ireland did in the 1990’s, Slovakia’s government has lowered taxes and wooed investors. As a result, foreign investment is now pouring in.

Direct foreign investment this year, at $1.1 billion in the last nine months, is already three times as great as in 2003. Economic growth is up 5.3%, to $33.3 billion in the last three quarters, outpacing growth in Hungary, Austria and the Czech Republic, and neck-and-neck with Poland. The biggest investments have been in automobile plants. Investors say Slovakia’s political stability, low labor costs and low taxes make it one of the most attractive economies in Europe. Slovakia replaced its income taxes, corporate taxes and sales taxes with a 19% flat tax this year. It also canceled its tax on dividends and simplified its labor laws, in part to make it easier to hire and fire workers.

Slovakia’s recent economic success is especially significant given its reputation in the mid-1990’s, when Madeleine K. Albright, the U.S. secretary of state, called it a black hole in the middle of Europe. In that era, soon after Communism fell, the authoritarian prime minister, Vladimir Meciar, turned his back on the E.U. and NATO. At the same time, multimillion-dollar state companies were privatized for pennies. Not surprisingly, investors stayed away, the economy stagnated and unemployment soared to nearly 20%. In 2002, Mr. Meciar’s successor, Mikulas Dzurinda, was elected to a second term, this time with a coalition of parties that are, like him, right-leaning, paving the way for pro-business changes.

Besides cutting taxes, the Dzurinda government brought the free market to health care and partly privatized the social security system. The average time it takes to set up a company has fallen from 90 to 50 days. Its labor costs, government officials said, are one-eighth those of Western Europe, with wages averaging $520 a month. By 2006, Slovakia is expected to leapfrog its neighbors, Poland and Hungary, in foreign direct investment per capita. Still, it is unclear whether the government has the support of its poor and middle class. About 21% of Slovaks live in poverty, an unemployment, though falling, remains above 17% and is even higher in the country’s underdeveloped east. At the moment, the country’s most popular politician is Robert Fico, who has criticized the tax cuts for industry and the wealthy and vowed to roll back the health care changes.

WHEN THE U.S. GOVERNMENT USES GAAP, IT IS NOT A PRETTY PICTURE

Two weeks ago, the U.S. Treasury posted on its Web site a financial statement for the country that was compiled in the same way companies are required to keep their books. The Web address (PDF file) alone should provide some hint as to how inaccessible this information is. Don’t think the government is suddenly becoming forthcoming with information. This fiscal report, using Generally Accepted Accounting Principles (or GAAP), is now required by law. The news was slipped out just before the holiday season and the release date was at least three months ahead of schedule. In the journalism business these are all signs that someone does not want the public to know something. So, just what could that something be?

I will let John Snow tell you in his own words, contained in report’s prelude that is titled “A Message from the Secretary of the Treasury”: “In the fiscal year 2004, government revenues were $1.9 trillion ... The net cost of the government’s operations was $2.5 trillion ... Total revenues less operating costs resulted in a net operating cost of slightly more than $615 billion,” Snow states. Allow me to translate: the government ran a deficit of $615 billion.

Notice that Snow took great pains to avoid using the term “deficit”. But even a kid with a paper route understands that when the “net operating cost” exceeds revenues, that is the definition of a deficit. You can be forgiven if you thought that Washington’s budget deficit was “just” $412 billion in the last fiscal year because that is the number the government puts out in the big press release, and is the figure that the media plays up. How can there be a $203 billion discrepancy in the numbers? It mostly has to do with Social Security costs and cash vs. accrual accounting. What the accountants call the net present cost of unfunded future obligations grew to a massive $11.1 trillion in the past year. That is why Social Security as well as Medicare needs to be fixed -- NOW.

THE FEDERAL ATTACK ON THE DOLLAR

In the wake of unrestrained U.S. federal spending, U.S. conservatives are no longer talking so loudly about how they brought down the Soviet Union -- by making it spend the nation into national bankruptcy. But the marketplace is speaking as loudly as conservatives once did, as reflected in the continued plunge in the international value of the dollar. Make no mistake about it: Despite all the economic mush and mish-mash that federal officials are now spouting, there is one and only one cause for the rapidly depreciating value of our currency -- uncontrolled federal spending, including spending on the so-called war on terrorism, the expansion of the U.S. empire around the world, the military adventure in Iraq, and domestic pork and welfare to mollify the American masses, including Social Security, Medicare, and Medicaid.

What we are talking about, of course, is the same problem that has bedeviled empires throughout history. Think of the Roman Empire, the British Empire, and the Soviet Empire. Bread and circuses, and none of it has ever been cost-free. All of it has inevitably entailed the bankrupting of a nation. Washington officials are doing what imperial powers have done throughout history -- debasing the currency to finance massive military and welfare expenditures. The consequence will inevitably be ever-increasing prices (inflation), which is simply the market’s way of saying that the currency is falling in value in comparison with everything else.

It is important to realize that our American ancestors tried to protect us from this type of immoral and destructive activity on the part of our government officials. For example, the Constitution did not empower the federal government to issue paper money and also expressly prohibited the states from making anything but gold and silver coins the medium of exchange and from emitting paper money. Thus, for most of the first 100 years or so of American history, Americans used gold and silver coins as their medium of exchange. Everyone knew that while government could crank up its printing presses, the value of their real money -- their gold and silver -- would simply rise along with everything else relative to the falling value of the government’s debt instruments. And that is why governments have always hated gold -- not only because it provides people with protection from uncontrolled government spending but also because it provides a very public signal of how much the government is debasing the currency. It should not surprise anyone that federal officials during the regime of Franklin Roosevelt, which sent federal spending through the roof, did exactly what totalitarian regimes have done -- they nationalized gold and made possessing it illegal

Today, however, it seems that there are more people than ever who are recognizing that unrestrained government spending is at the root of the dollar crisis. That might even be why President Bush says that he now favors a massive decrease in federal spending, especially within the military-industrial complex. By doing so, he is effectively admitting that the looming monetary crisis is rooted in uncontrolled federal spending. If only conservatives, who so proudly proclaimed that they brought down the Soviet Union, would rise up and take a stand against the massive federal spending that threatens the stability and viability of our country! But, alas, having committed themselves to all the socialist and interventionist programs that such spending funds, conservative lips unfortunately now remain sealed.

TAIWAN GETS REAL: HOW WILL WASHINGTON AND BEIJING RESPOND?

Last week, Mr. Chen’s Democratic Progressive Party (DPP) and its allies were stunned when an opposition alliance -- which was disorganized and beset with squabbling -- won the country’s legislative election, taking 114 of the 225 seats. The success of the Nationalist Party and its allies, the People First Party and the New Party, in preserving their slim majority in the legislature should curb the aspirations of the pro-independence forces in the DPP, whose actions have engendered a significant deterioration in relations between Taiwan and the mainland. How will the result be viewed in Washington and Beijing? Will the region remain a comparative bastion of stability and prosperity? Or will Taiwan become the next conflict flash point after North Korea?

An improvement in relations between Taiwan and the People’s Republic of China would be a welcome development, given existing tensions on the Korean peninsula. Taiwan’s Nationalists and their allies have vowed to block President Chen’s plans to write a new constitution for the island and take other actions that Beijing has labeled as provocative and possibly leading to war. They have already proved themselves reticent to approve a fresh $18 billion purchase of weapons offered by the Bush administration, viewing it as unduly antagonistic to China, which has thus far refused to have any meetings or negotiations with President Chen until he accepts the PRC’s “one China” policy -- a demand consistently refused by Taiwan’s president.

So will this election result cool rising temperatures across the Taiwan Straits? There are solid economic reasons to cool the conflict: Trade and investment have exploded across the Taiwan Strait. China has become Taiwan’s largest export market, and also the destination for some $70 billion or more in Taiwanese capital, second only to the U.S. Of more long term significance is Washington’s response to this new development. If the war on terror has had any silver lining from China’s perspective, it has been that the Un.S. has ratcheted down its conflict with Beijing, which the President termed a “strategic competitor” in his first year in the White House. But recently, the Bush administration’s calls for restraint has been directed less at Beijing and more on President Chen’s drive to secure the trappings of independence.

So far Washington has managed to deliver the right combination of deterrence and reassurance to both Beijing and Taiwan to keep this problem off the boil. But President Chen’s increasingly provocative drive to secure legal independence has until recently placed the U.S., indeed, the region as a whole, in an increasingly awkward position. To force the island to confront the full implications of a drive to independence, the U.S. would do well to remove its security guarantee. Taiwan is now a grown-up democracy and its voters should therefore be ready to face the full consequences of their electoral decisions. Shorn of the American guarantee to underwrite its foreign policy adventurism, Taiwan’s voters will be forced to step back from the brink.

By the same token, Washington’s attempt to engender further moderation will likely reap benefits for the US as well, especially in relation to the dollar. If the dollar’s decline does in fact mirror to a degree America’s plunging status in the region, then any constructive moves to alleviate geopolitical tension could prove supportive of the greenback and thereby help to retain the Asian central bank “bid” in the bond market (and by extension the mortgage securities markets). The Bush administration’s overall aspirations in the region and its dollar diplomacy will therefore be very closely influenced by the manner in which it deals with the problem of Taiwan in the coming months.

THAILAND EXPECTS TSUNAMIS TO SLOW GROWTH

Thailand’s finance ministry cut its 2005 economic growth forecast to 5.7% from 6% after tsunamis lashed six coastal provinces, killing more than 1,800. Thailand may lose about 30 billion baht ($767 million) from tourism earnings over the next three months after giant waves caused by a 9.0 magnitude earthquake off Indonesia on Sunday destroyed hotels and resorts in Phuket and five other coastal provinces, Sontaya Kunplome, the tourism minister, said. Thailand, one of Southeast Asia’s largest economies, is the first among the countries most severely affected by the earthquake and tsunamis to formally cut its growth forecast. Thai Airways International, the country’s biggest airline, said that passengers have canceled 270 million baht ($6.9 million) of bookings up to the end of next month.

A 5.7% economic growth rate would be the slowest since 2001. The economy may expand 6.2% this year, compared with 6.9% in 2003, according to the ministry. Before the tsunamis, the Tourism Authority of Thailand had forecast that 13.4 million travelers would visit the nation next year. Revenue from overseas tourists was forecast to rise 24%, to about 384 billion baht ($9.8 billion). About 4 million foreigners visit the affected provinces each year, according to the Thai Hotels Association. “It will take until the fourth quarter of next year before tourist visitors in Phuket and the five other provinces return to their normal level,” Naris Chaiyasoot, director general at the ministry’s fiscal policy office, said at a news briefing in Bangkok.

The impact of the slump in tourism next year will be mitigated by government spending to help rebuild the affected provinces and other public works projects, according to Ms. Sirinattha at Syrus Securities. Overseas tourist numbers may fall less than expected as visitors shift their destinations to other parts of the country, like the beach resorts in the Gulf of Thailand, she said. Thailand, which gets 6% of its GDP from tourists, said it planned to spend about 30 billion baht to rescue victims of the tsunamis and to rebuild coastal areas like Phuket.

SWISS GOVERNMENT BY CONSENSUS FAILS TO TAME BLOCHER

At the end of his first year in Switzerland’s consensus-driven cabinet, Justice Minister Christoph Blocher remains as divisive and controversial a figure as ever. Opinions differ about his achievements in government, but allies and enemies alike agree that he has changed the complexion of government. A former businessman, the billionaire and veteran parliamentarian was elected to the Swiss government in December 2003, after his rightwing Swiss People’s Party triumphed in parliamentary elections two months earlier.

His election changed the traditional make-up of the cabinet, prompting hopes and fears about what it would mean for Switzerland’s multi-party government. Twelve months on Kurt Imhof, a sociologist at Zurich University, has no doubts about Blocher’s impact. “We are facing a divided cabinet,” he said, adding that the unprecedented number of leaked stories about alleged conflict within the cabinet would erode confidence in the government with far-reaching consequences for society and the economy. “It was naïve to think that Blocher could be tamed by integrating him into the seven-member cabinet,” said Imhof.

Blocher has not shied away from controversial statements and actions, such as inviting another cabinet member to step down -- not done in Switzerland -- and trying to force through drastic spending cuts. As a cabinet minister he is expected to support government policy and abide by the principle of collegiality. But he has flouted cabinet rules on a number of occasions, triggering heated debates and angry reactions.

ST. VINCENT & GRENADINES OPPOSITION LEADER CALLS FOR AG’S RESIGNATION

The Opposition New Democratic Party (NDP) in St. Vincent and the Grenadines, wants to see the back of the country’s Attorney General Judith Jones-Morgan for the year 2005. Speaking via a recent press release, the NDP’s President and Leader of the Parliamentary Minority Arnhim Eustace expressed the view that Jones-Morgan should resign following what is being referred to as an apparent drug-related matter in London involving her husband’s relative.

Earlier this month, Ruben Morgan was arrested by police in London for allegedly having one kilo of cocaine on his person while arriving at an airport in London. Morgan at the time, was in possession of a diplomatic passport of St. Vincent and the Grenadines. The document was issued to Morgan by the ULP Government of Prime Minister Dr. Ralph Gonsalves. Morgan along with the AG and her husband had travelled separately to London to attend a funeral. According to Eustace’s release, Morgan’s arrest will cast a dark shadow over the country as the name of St. Vincent will be tarnished both in the Caribbean and the international community. When word of Morgan’s arrest was reported, the St. Vincent and Grenadines Government immediately instructed the country’s London High Commission to recall Morgan’s diplomatic passport.

THE TRIAL OF JOHN SNOW

Treasury Secretary John Snow “can stay as long as he wants, provided it is not very long,” is destined to go down in history as one of those classic Washington phrases. The phrase appeared in an article in The Washington Post as a quote from “a senior administration official” one week before the president finally announced Mr. Snow would be retained. For some time, officials of the Bush administration also made it known they were looking for a replacement, but in the end seemed unable to find someone both willing to take the job and clearly superior to Mr. Snow. John Snow came to the job two years ago with good reviews after the disappointing performance of his predecessor, Paul O’Neill. So what went wrong?

The first charge against Mr. Snow has been his very uneven public presentations. He has given first-rate speeches, but all too often he has given very muddled talks and press interviews. Despite his personal enthusiasm for the president and the Bush tax cuts, he failed to effectively utilize his Treasury staff to counter the Democrats’ economic offensive and misstatements. This failure resulted in the American people believing the economy was in far worse shape than it was (and is), and this misinformation reduced the president’s economic approval ratings and unnecessarily cost him votes.

Those who are concerned about the fall in the dollar also criticize Mr. Snow for his mixed messages on the issue. He has said the administration favors a strong dollar, while at other times he seemingly implied he likes the weaker dollar because it will help manufacturing exports. He has tolerated performance by some of his staff whose personal agendas have undermined administration positions. One example is a proposal (made in the last week of the Clinton administration) by the IRS to provide tax information to certain foreign governments (such as France) on nonresident aliens who invest in the U.S. economy and have no U.S. tax liability. Opposition is intense because the move would undermine our economic and national security, violate financial privacy rights and weaken the dollar. Mr. Snow told several senior members of Congress he would withdraw the proposal. By not doing so he has damaged his credibility.

In the eyes of Washington, John Snow is now clearly “on trial”. Other than national security, there are no bigger administration priorities than “tax reform” and “Social Security reform”, which are both Treasury issues. Two years ago, the president told us John Snow could do the job, and many of us gave him a ringing endorsement. But he has little time to improve his hand so that those who are betting Mr. Snow will melt before spring will need to pay up.

JAILED OIL TYCOON WARNS KREMLIN AGAINST CONTINUING CURRENT COURSE

In his harshest criticism of the Kremlin to date, Mikhail B. Khodorkovsky, the businessman who founded Russia’s largest oil producer, Yukos, accused the government of stealing his oil empire and warned in a letter that a continuing crackdown on post-Soviet freedoms would ruin the country. Writing from prison, where he has been held since October 2003 on charges of tax evasion and fraud in a separate privatization deal, Mr. Khodorkovsky said the sale of Yukos’s main production unit into state hands this month “was the most senseless and destructive event in the economic sphere since President Vladimir V. Putin has taken helm.”

“Using selective justice, introducing new legal norms and applying them retroactively,” he continued, the state has undermined trust in the legal system. “Such methods,” he added, “damage the nation’s reputation and hurt the economy, but those who initiated that don’t care.” Mr. Putin has cast the 18-month crackdown on Mr. Khodorkovsky and Yukos as an effort to fight corruption and shady bookkeeping. But most analysts and commentators see it as a vendetta for Mr. Khodorkovsky’s perceived political ambitions, including his financing of opposition parties.

The strange Yukos sale.

The tale of the Yukos sale is just about as sorry a story as business enterprise can get in Russia, and it keeps getting weirder. Mr. Putin, bent on destroying Yukos and its jailed founder, Mikhail Khodorkovsky, was preparing for what was to be the final swing of his dull ax, the “auction” of Yukos’s most critical asset to Gazprom, the Russian state energy behemoth. But Yukos’s remaining managers, now wisely living abroad, hit on the idea of filing for bankruptcy protection in Houston. More amazing, the judge there issued an injunction against the auction. Russian authorities predictably jeered the ruling and declared that they were going ahead with the sale of the subsidiary, known by the catchy name Yuganskneftegaz.

Still, the ruling by Judge Letitia Clark had an immediate impact. Western banks, which had put together a multibillion-dollar loan for the sale, balked at defying an American court. When the auction opened last Sunday, the Gazprom representative suddenly had to leave to answer his cellphone. When he came back, the only bidder left was a shell company named Baikal Finans Group, which lists the address of a cellphone store 170 miles from Moscow. Baikal picked up Yuganskneftegaz for only $500 million more than the starting price of $8.87 billion, which was already obscenely low for a company that pumps 11% of Russia’s oil.

It hardly came as a surprise when Baikal was swiftly bought by Rosneft, a state-owned Russian oil company. From the jailing of Mr. Khodorkovsky in October 2003, through a progression of ever more ridiculous tax bills and made-for-TV searches, Mr. Putin has left little doubt that the goal is to get the Russian oil industry back into the hands of the state. Nobody argues that Yukos, a product of the piratical privatizations of the early 1990’s, is an innocent victim. Russia certainly can choose to nationalize the industry. But reversing a piratical privatization through a piratical nationalization only confirms that doing business in Russia remains highly risky.

TAXES

EU MAY APPROVE TRANSITIONAL TAX REGIME FOR GIBRALTAR IN NEW YEAR

Gibraltar’s Chief Minister, Peter Caruana, revealed that the EU is close to agreeing to accept revised proposals for a transitional tax regime while the EU Court of Justice decides over the validity of the jurisdiction’s long-term corporate taxation structure. Caruana declined to divulge any further details as to the complexion of the agreement.

Gibraltar has been attempting to overhaul its company taxation system by introducing a new regime which will replace the mainstream 35% corporate tax and tax-exempt company forms with a payroll tax and a business property occupation tax, both of which will be capped at 15% of profit. However, this plan has been blocked by the EU’s decision that the jurisdiction effectively constitutes part of the UK, and therefore such a tax regime would breach EU state aid rules. Gibraltar wants a transitional regime to apply while its appeal against the state aid ruling is heard by the European Court of Justice, a process which could take years.

IRS EXPANDS PRE-FILING AGREEMENT FOR LARGE BUSINESS

Large and Mid-Size Business division taxpayers seeking to resolve certain tax issues prior to filing their tax returns may now do so for up to four years under the IRS Pre-Filing Agreement (PFA) Program. The PFA program is designed to permit a taxpayer to resolve the treatment of an issue before the filing of a return. According to the IRS, the program reduces taxpayer burden and makes more effective use of resources by eliminating tax controversy before the tax return is filed and providing certainty that agreed upon tax positions will not be challenged during the post-filing examination process.

TAX REFORM DROPS DOWN BUSH’S LIST OF PRIORITIES

Reforms of the U.S. tax code pledged by George W. Bush will take a back seat to an overhaul of the social security system during the President’s second term, recent reports emanating from Washington have suggested. If the reports are true, this will mean that tax reform is likely to be undertaken in smaller, incremental stages starting from 2006, rather than as a more ambitious root and branch reform of the tax system. However, while continuing to hold its cards close to its chest on the issue, the White House has sought to play down speculation that tax reform has been forced lower down the administration’s list of priorities by social security reform and a budget that may call for cuts in non-defense spending to bring down the federal deficit.

SIX ANDERSON’S ARK ASSOCIATES CONVICTED IN U.S. TAX SHELTER SCHEME

A federal jury convicted six people in a tax shelter scheme that helped 1,500 people take $120 million in false income tax deductions from 1997 to 2001. Justice Department officials called the scheme by Hoodsport, Washington-based Anderson’s Ark and Associates one of the most far-ranging tax shelter schemes ever prosecuted.

The defendants earned tens of millions by charging clients $50,000 to $250,000 each to buy tax-shelter plans over the Internet. The scheme involved investments in shell companies, illusory loans from Costa Rican bank accounts and other superficial transactions to make it appear that clients had legitimate, tax-deductible business expenses. After a 7-week trial, the six defendants were convicted of conspiracy to defraud the government, mail fraud, wire fraud, money laundering, and aiding and assisting the filing of false tax returns. The jury was unable to reach a verdict regarding four other defendants. The government is deciding whether to refile charges against them.

ASSET PROTECTION

HACKING AROUND THE CHRISTMAS TREE

Hackers, spammers and spies go into overdrive in December and January, when unsuspecting neophytes unwrap new computers, connect to the Internet, and, too often, get hit with viruses, spyware and other nefarious programs. “People want to get on the net right away, just like they want to put together and start using any Christmas present,” said Tony Redmond, chief technology officer of Hewlett-Packard, whose new PCs ship with 60 days of virus and adware protection. “They should be warned that the net is a very, very dangerous place.”

Holiday viruses are so rampant that consumers could be attacked even if their first online destination is to a website for updating security patches. Kris Murphy, help desk coordinator for North Carolina internet service provider Indylink.org, said his minister got attacked last year, only a few minutes after unpacking and connecting the machine. At the time of infection, the minister was updating security patches to Windows. “Hackers know that you are most vulnerable as soon as you go online for the first time,” said Murphy. “Inexperienced people tend to fall into traps more readily because they don’t recognize that this guy might be trying to get your credit card information.”

Technology executives describe the relationship between hackers and security programmers as an arms race -- both sides keep ratcheting up fire power. But lack of consumer awareness allows the war to escalate. In a Consumer Reports study, 36% of U.S. home computers showed signs of being infected with spyware and only 41% of surveyed households said they actively try to prevent it. Seasonal attacks start around Thanksgiving, when online shopping begins an annual spike and marketers pummel consumers with junk e-mail -- from the perfect stocking stuffer for a balding spouse to a limited-offer holiday cruise. With the rise in e-commerce, identity thieves try even harder to obtain credit card and other financial data from wireless and home networks. They set up dummy websites that seem to be hosted by major financial institutions in hopes that gullible consumers will provide their account information.

Virus writers hide viruses and worms in holiday-themed e-mails, seasonal greetings cards and screensavers. “W32/Zafi-D”, a mass mailing and peer-to-peer worm, harvests addresses from Windows address books and other files. Infected e-mails’ subject line begins, “Merry Christmas!” and the text reads, “Happy Hollydays”. The most vulnerable computers are the ones that have sat under Christmas trees for days or weeks. If a consumer buys equipment that arrives on Dec. 15, and it sits in the living room until Dec. 25, it could be hit by hundreds of viruses written in the 10-day interim.

TUNE IN, TURN ON, DROP OUTLOOK

[Editor’s note: Securities flaws in the Windows operating system, as, e.g., discussed in this piece, can result in theft of one’s private data and possibly becoming a victim of identity theft. The ubiquitous Microsoft browser, Internet Explorer, and email client, Outlook, that come with Windows are part of the security-risk package.]

If you find yourself spending more time sorting your e-mail than reading it, consider the Mozilla Foundation’s new Thunderbird e-mail client. The free, open-source, program, which complements the group’s Firefox browser, combines advanced e-mail sorting functions, first-rate spam filters, and lightning-fast performance to help you cut through your inbox like a hot knife through butter. I tested version 1.0 of Thunderbird (a 5.8MB download). After years of using Microsoft Outlook, the switch was like trading in a big, lumbering Buick for a Mustang GT. A mere second after you launch the program, it is ready to retrieve your mail or compose a message. With Outlook, you launch the app and then go get a cup of coffee while it loads its numerous modules and applets. Thunderbird’s interface is equally sleek, borrowing many of the best elements of its sibling Firefox.

Like most people, I am in too much of a hurry to create a nice, neat folder hierarchy for my received e-mail, so I tend to keep all my messages in the inbox. That is why my favorite Thunderbird feature -- and the one that may get me to dump Outlook for good -- is the ability to create custom views of the inbox based on easy-to-set rules. Of course, any e-mail program worth its salt today has to be able to handle spam, too. Thunderbird’s Junk Mail Controls include adaptive filters that are trained to identify spam based on the contents of your incoming messages. The feature also helps keep viruses off your system by blocking JavaScript from executing in news and mail messages. Thunderbird supports all POP3 and IMAP e-mail accounts, as well as AOL Mail and HTML mail. In addition to e-mail, Thunderbird offers support for newsgroup access and includes an RSS news reader. The program has a basic Address Book, but it lacks an integrated calendar.

Despite Thunderbird’s open-source underpinnings and collective development, the program’s documentation is sparse. The link in Thunderbird’s Help menu to the support Web site was broken each time I tested it, too. The program shows its 1.0 nature in other ways, but proved robust enough to become my number one e-mail client in no time. I can say unequivocally that if you are still using Microsoft’s outdated Outlook Express, you should switch to Thunderbird immediately -- no questions asked.

TRACING SADDAM’S BLACK MARKET TRADING HAMPERED BY EXTENSIVE USE OF FRONT COMPANIES

The U.N.-ordered probe into oil-for-food corruption is being seriously hampered by an elaborate system of ghost firms set up around the world to cover the tracks of bribes to Saddam Hussein as he cheated the $60 billion program, a top investigator said. Some front companies in this global oil trading center and elsewhere that dealt with Saddam have been liquidated or have hidden ownership, complicating the search for evidence of financial improprieties, said Swiss criminal lawyer Mark Pieth -- one of three commission members leading the probe headed by former U.S. Federal Reserve chairman Paul Volcker.

Major oil trading companies and individuals -- from American businessmen to French, Chinese and Russian politicians -- are suspected of benefiting from lucrative Iraqi oil contracts that involved kickbacks, according to the independent panel’s initial findings. Those who profited may have hid behind a web of fiction by making transactions through ghost firms that exist mostly on paper, said Pieth.

Despite the thin trail, Pieth said he was confident investigators would ultimately trace the funds back to those who may have made illicit profits -- or allowed Saddam and his regime to profit illegally -- during the oil-for-food program, which existed from 1996 until 2003. “It is a problem. Yes, of course it is, but on the other hand we also have means of finding the beneficial owners,” Pieth said. “There is usually a file, if the banks have done their job.” Pieth said national authorities and banks in Switzerland and other nations where front companies handled oil-for-food deals should have their own records of who was behind the firms.

PRIVACY

LAPD IS EXPERIMENTING WITH FACIAL-RECOGNITION SOFTWARE

The Los Angeles Police Department is experimenting with facial-recognition software it says will help identify suspects, but civil liberties advocates say the technology raises privacy concerns and may not identity people accurately. “It’s like a mobile electronic mug book,” said Capt. Charles Beck of the gang-heavy Rampart Division, which has been using the software. “It’s not a silver bullet, but we wouldn’t use it unless it helped us make arrests.” But Ramona Ripston, executive director of the American Civil Liberties Union of Southern California, said the technology was unproven and could encourage profiling on the basis of race or clothing. “This is creeping Big Brotherism,” Ripston said. “There is a long history of government misusing information it gathers.”

Police have been testing the technology on Alvarado Street just west of downtown Los Angeles. In one recent incident, two officers suspected two men illegally riding double on a bicycle of being gang members. If they were, they may have been violating an injunction that barred those named in a court documents from gathering in public and other activities. As the officers questioned the men, Rampart Division Senior Lead Officer Mike Wang pointed a hand-held computer with an attached camera at one of the men. Facial-recognition software compared his image to those of recent fugitives, as well as to dozens of members of local gangs. Within seconds, the screen displayed nine faces that had contours similar to the man’s. The computer said the image of one particular gang member subject to the injunction was 94% likely to be a match. That enough to trigger a search that yielded a small amount of methamphetamine. The man did turn out to be the gang member, and was arrested on suspicion of violating the injunction by possessing illegal drugs. The city attorney’s office has not yet decided whether to charge the man.

Other experiments with facial-recognition software have had mixed results. Officials in Tampa, Florida, stopped using it last year because it did not result in arrests. And at Boston’s Logan International Airport in 2002, two systems failed 96 times to identify people who volunteered to help test it. The technology correctly identified 153 other volunteers. Luis Li, chief of the Los Angeles city attorney’s criminal branch, said the technology should not present legal problems because it was used only as an initial means of identification. “If you are standing in the street, you have no expectation of privacy,” he said.

ACLU ANNOUNCES ONLINE COMPLAINT FORM FOR AIRLINE SECURITY GROPING

The American Civil Liberties Union warned that women still remain susceptible to sexual harassment at airline security gates, and announced that it has posted an online complaint form that travelers can use to describe any abuses that take place. “The TSA is subjecting many women to groping and sexual harassment that does not serve any real, justified security purpose,” said Lenora Lapidus, Director of the ACLU’s Women’s Rights Project. “Women who have been subject to humiliating searches can help us fight this misguided security policy by visiting our Web site and letting us know about their experience.”

According to press accounts and complaints filed by passengers across the country with the ACLU, TSA screeners have been widely disregarding the agency’s own guidelines as well as common standards of decency. “Are the insides of women’s bras really our top airline security vulnerability at a time when we are still not checking airline cargo containers or many checked bags?” said Barry Steinhardt, Director of the ACLU’s Technology and Liberty Project. Steinhardt also pointed out that the government was failing to make use of a significant potential alternative to intrusive and uncomfortable pat-downs: Explosive Trace Detection Systems, particle detectors that, when set to look for explosives, pose no threat to the privacy or dignity of passengers.

The ACLU recommended that airline passengers familiarize themselves with the TSA’s guidelines (available on the ACLU’s Web site) so that they at least know how they are supposed to be treated -- but also cautioned that it can be difficult to raise objections in the airport-security setting, and that the only real solution is to press for a change in this policy.

AGENCIES CLASH ON FINGERPRINT DATABASE

More than three years after the Sept. 11 attacks, the Bush administration has failed to create a unified U.S. fingerprint database because of agency infighting, meaning most visitors to the country still are not fully screened for terrorist or criminal ties, the Justice Department’s watchdog warned. Continued bureaucratic clashing -- the very behavior the Bush administration pledged to end after the attacks -- “creates a risk that a terrorist could enter the country undetected,” said Inspector General Glenn A. Fine in his fourth report about the problem.

Despite some improvement, the Justice, State and Homeland Security departments are at an impasse over such basic issues as whether two or 10 fingers should be printed at U.S. borders and which law enforcement agencies should have access to immigration information. “Progress toward the longer-term goal of making all biometric fingerprint systems fully interoperable has stalled,” Fine’s report concluded. Without an integrated system, the review found that watch lists used to check certain visitors at the borders contain only a small portion of the 47 million records in FBI fingerprint files -- the Integrated Automated Fingerprint Identification System, or IAFIS -- and that these incomplete lists are prone to error.

Currently only about 1 percent of an estimated 118,000 daily U.S. visitors whose fingerprints should be checked are actually run through the FBI files, “the most complete and current law enforcement database,” Fine said. Since the 2001 attacks, Congress has repeatedly pushed the agencies to devise a single, quick fingerprint identification system that could be used by all law enforcement agencies as well as immigration and intelligence officials. The agencies’ inability to reach common ground runs counter to the repeated pledges of cooperation that followed the Sept. 11 attacks.

DIGITAL FINGERPRINTING ARRIVES AT THE CANADIAN BORDER

Federal officials in International Falls, Minnesota hope digital fingerprinting technology installed at the border crossing this week will both make the border more secure and speed the process of entering the country. Visitors to the U.S. passing through the border crossing at International Falls, and 49 other busy Canadian crossings, will be fingerprinted. Those prints will be cross-checked against databases of known criminals and terrorists. The process will apply to anyone who needs a visa to enter the U.S., which means Canadians will not be scanned.

North Dakota border crossings will have the fingerprinting technology installed by the end of 2005. Ken Henrickson, chief inspector for the Customs and Border Protection agency, said the new process takes just a few minutes. The old system required people to show their passports and visas and fill out immigration forms. Inspectors would then have to verify the person’s identity. The whole process took about 15 minutes. Henrickson estimated that only a few thousand of the about 2 million people who came into the U.S. through International Falls every year will get fingerprinted. Most visitors at the crossing are Canadians.

The 5,525-mile Canadian border has one U.S. border guard for every 10 watching the Mexican border, Asa Hutchinson, undersecretary for border and transportation security, said. His department has given grants to pay border guards overtime to increase patrols, resulting in a “historic level of security for the northern border,” he said. Unmanned aerial vehicles -- now being used to patrol the Mexican border -- may be added on the Canadian border, he said. But there is no substitute for people who live near the border who spot and report suspicious activities, he said. The border crossing now employs about 50 people, more than twice what it did a few years ago.

LAW

THE LARGELY DEFUNCT BILL OF RIGHTS

The Founding Fathers created a Bill of Rights to ensure that Americans would never have to fear government prosecutors the way people in the Old World did. Unfortunately, the Bill of Rights is a dead letter in too many ways in America. It has now become possible for prosecutors to get a conviction in virtually every case where they choose to indict -- whether or not the defendant is guilty. Fortunately, however, a number of prominent writers are alarmed about the problem -- including some people you might expect to be law-and-order conservatives. Here are some articles that explain aspects of this prosecution crisis -- a crisis that, to the best of my knowledge, no Republican or Democratic candidate raised in the last election.

FEDS CHASING SUSPECTED TERRORIST FINANCIERS AROUND THE WORLD ARE OUTRUN BY ... TRIAL LAWYERS

The tort attorneys, rather than regulators and lawmakers, could transform international banking by defining the new business risks of operating in the terror-rich Middle East. Lawyers chasing terror money scored their first victory on U.S. soil in December when a federal judge ruled that American donors to shadowy Islamist charities must accept the consequences when their money underwrites an act of terror abroad. Judge Arlander Keys ruled that three Muslim charities and one Muslim-American donor were liable for the death of American teenager David Boim in Israel at the hands of Hamas terrorists in 1996. The judge ruled that Boim’s death was a “foreseeable consequence” of funneling money to groups associated with terror -- and assessed a $156 million fine against the defendants.

Lawyers did not seek to hold any banks liable for transferring terror money in the Boim case -- they focused on the charities. But two new civil-court cases do have the deep-pocketed banks in their sights. On the third anniversary of 9/11, trial lawyers filed suit in New York on behalf of Cantor Fitzgerald and the Port Authority -- tenant and owner of the World Trade Center -- against prominent Saudi princes and banks. That suit alleges that Saudis donated money to Islamist terrorists, and that some Saudi banks served as willful conduits for those donations. The suit claims that 9/11 was the foreseeable consequence, and demands billions of dollars in damages. That case could set a precedent for foreign banks. If a New York judge sets a trial here, Saudi banking titans would have to mount a defense in U.S. court, or risk forfeiting their right to do business in our markets.

A third case, filed last week in Brooklyn against Jordan-based financial giant Arab Bank, could change the way western banks do business in the Middle East. Filed on behalf of nearly 200 Israeli and American victims of Palestinian suicide bombings, the case alleges that Arab Bank established accounts in the Palestinian territories through which Saudi donors compensated the families of Palestinian suicide bombers. The complaint alleges that Palestinian government officials assigned the families of some deceased bombers unique numbers to confirm their status as relatives of a “martyr”.

The plaintiffs’ claim for jurisdiction in America on this point has clear implications for U.S. and European banks that do business in the terror-rich Middle East: The plaintiffs do not claim that a crime was committed on U.S. soil -- only that Arab Bank’s American financial infrastructure was used to help fund terror overseas. Arab Bank denies wrongdoing. But the bank chooses to operate branches in the Palestinian territories, thus assuming the financial and reputational risk of doing business in a region infested through and through with terror. American lawyers can be expected to argue that -- at the very least -- Arab Bank should have known that its formal financial infrastructure in the Palestinian territories inevitably would be hijacked by terrorists.

Now banks in the West must reassess the risk of doing business there. They must wonder if their financial infrastructure in Saudi Arabia, and their ability to access hard currency here for Saudi clients, has helped terrorist financiers. Global banks with business in America now take the chance that a judge or jury in a civil court case could find that they should have known not to risk doing business in a region shadowed by terror. Creative trial lawyers could ask a judge to rule that “know your customer” expands to “know your country”. A crippling verdict against Arab Bank, or the publicity that would come with a trial, could convince banks that they just cannot risk having their American financial assets tainted by Mideast money destined for suicide bombers.

CLEAN MONEY, DIRTY CONSCIENCE

The headline grabbing quirkiness of Yasser Arafat’s investment in the American bowling industry demonstrates that true global connectedness remains a scary thing. Such financial scorekeeping -- whose money, what money, where -- is a pointless exercise in an age when funds can circle the Earth in a second and mutate several times along the trip. The clean money, dirty money, blood money obsession would be quaint were it not for the tremendous burden the pursuit of money laundering places on innocent people just trying to enjoy the immense benefits of a modern financial system. The PATRIOT Act’s veil of secrecy is beginning to bite in this regard without any evidence that the United States is made safer in the bargain.

Some Middle Eastern-surnamed individuals in the U.S. now report an unwillingness on the part of some banks to do business with them based on government money laundering/anti-terror regulations. In fact, while other parts of the PATRIOT Act initially drew fire, Section 314 glided by, largely overlooked by everyone except the bankers. As it turns out, Section 314 is a ticking time-bomb for anyone a buttoned-down banker might consider suspicious. This section requires banks and other federal regulated financial institutions to comply with government requests for information on customers. Section 314 built upon other long-standing federal bank regs, but anticipated and sanctioned a much larger number of information requests in a much shorter period of time, increasing the cost of compliance to banks.

Banks are supposed to comply with Section 314 requests quickly and accurately, divulging no information to anyone about them, and then promptly forget all about the requests. This practice does avoid flooding the reporting system with replies that say, “yes, Potential Terrorist X is not among our customers,” but leaves a bank with the queasy feeling that it responded to federal regulators by doing nothing. This is not in the nature of bankers. So rather than risk the wrath of regulators, banks very quickly hit upon the idea of keeping names submitted on Section 314 requests on their do-not-do-business-with lists. All banks have them and the lists are perfectly legal. After all, some customers -- bad credit risks, chronic check bouncers -- may just be more trouble than they are worth.

This brings us to the question of the day: Has Section 314 made all Muslim-surnamed customers, or even more broadly, those of Middle Eastern descent in general, more trouble than they are worth to American banks? The American Civil Liberties Union says it has dozens of complaints involving financial institutions denying services to Muslims. It is certainly true that the more Middle Eastern names a bank has on record, the more likely it is to be forced to complete Section 314 information requests. The more requests you get, the more likely you are to screw one up and get walloped with a fine. Why not lighten that load and reduce that risk by cutting back on “trigger” names? The logic is undeniable.

Maybe that outcome does not trouble the 44% of Americans who say in a poll that they favor restrictions on the civil liberties of Muslims in the U.S. However, it guarantees that some law-abiding Muslims will face frustrating hurdles to living their lives as everyday Americans. And that is troubling to anyone who values freedom and real, lasting security.

MONEY-LAUNDERING RULES “A LOT OF WORK”

Some people may be surprised to learn that one of the linchpins in this nation’s war on terrorism is the Bin & Barrel Mini Mart in Fremont, California. Manager Sonia Cheema certainly was after her dad bought the store in October. Under federal rules still being fine-tuned, she discovered, the Bin & Barrel -- like thousands of other small businesses -- must have a written plan for foiling money-laundering terrorists. It also must have a “compliance officer” to ensure the plan is heeded, train its employees to spot shady transactions and regularly audit its own performance.

That is not all. While not widely known, the Bin & Barrel and every other U.S. business must steer clear of people on the government’s 192-page list of “specially designated nationals”, which has more than 5,000 names and is updated frequently. Otherwise, business people could face huge fines and a long stay in prison. “Oh, gosh! Imagine one person coming to cash a check and going through a list,” said the 25-year-old Cheema, who has temporarily stopped cashing checks and processing money orders, at least until she understands the federal rules better. “It’s going to be a lot of work. ... I don’t think it’s worth it.”

On Sept. 24, 2001, President Bush signed an executive order barring business dealings with anyone on the specially designated list, which includes the names and aliases of suspected terrorists, drug kingpins and their associates. Those failing to comply can be fined $10 million and jailed up to 10 years. That was followed a month later by enactment of the USA Patriot Act, which forces “financial institutions” -- broadly defined to include everything from liquor stores to pawn shops -- to have detailed programs for combating money-launderers.

Under its enforcement provisions, business operators face potential $500,000 fines and 10-year prison terms. The Patriot Act already is in effect for casinos, mutual funds, credit-card firms, banks and “money service businesses” like the Bin & Barrel, which offer such things as check cashing and money transfers. Still others -- jewelers, vehicle dealers, travel agents, loan companies, investment firms and people involved in real-estate closings -- are waiting for the government to issue their regulations under the act. As word about the law spreads, many business people do not like what they are hearing.

OPINION & ANALYSIS

ELECTIONS (AND DEMOCRACY) ARE NO PANACEA

President Bush’s basic premise for his Iraq policy seems to be that once democracy is established there, it will spread to surrounding countries, and that democratic countries will not pose a threat to us. I think this reflects the bias that is shared by politicians and political junkies of all persuasions -- i.e., that government is all-important. But I believe that for most Americans, and people everywhere, that unless we work for the government, our lives really do not intersect with it very much, except when it intrudes in the form of a parking ticket or a tax bill. We mostly take it for granted.

That is why I think the president is more interested in the Iraqi election than the Iraqis are. What they want most of all are security and a restored infrastructure. Unfortunately, they see us as the “government” that failed to provide either. Not until life returns to normal will the average Iraqi have much thought about government. In other words, we are working in the wrong order. We want elections, security and infrastructure, while the Iraqis want security, infrastructure and then elections. My guess is that right now they do not care what kind of government it is as long as it can make them feel safe in their homes and on the streets, and provide them with water, electricity and sanitary sewers.

And this brings up another point to keep in mind: As far as the average citizen is concerned, an authoritarian government can provide that infrastructure and security as well as leave people mostly alone in the areas that matter to them -- family, jobs, recreation. It has often been said that the ideal form of government is a benign despot, since a despot can provide the services people want more efficiently than can a democracy, where everything has to be argued and compromised. People will oppose a despot if he is unnecessarily cruel and intrusive, or if he allows the country’s economy and infrastructure to collapse. But if he limits his punishment to people actively opposing him and otherwise runs a decent country, most people will be content. The president is simply wrong.

As usual, our main focus is on governments that can sign contracts with corporations and buy American military machines, but it should be on the people. Most of them do not like us for the very sensible reason that about the only thing U.S. foreign policy has done for them is to increase their misery.

GREATER GOVERNMENT SPENDING HAS NOT ENHANCED NATIONAL SECURITY

Since the September 11 attacks, real (inflation-adjusted) spending on defense has increased 23%, even when excluding the whopping $250 billion bill for the wars in Afghanistan and Iraq from the count. Even without those supplemental expenditures, the U.S. budget for national defense is an eye-popping $421 billion for fiscal year 2005, according to Chris Hellman of the Center for Arms Control and Non-proliferation. Many taxpayers assume that the ballooning budgets mean greater security, but the facts tell a different story.

Most conservatives often wrongly assume that the military and other security agencies spend money more effectively than governmental departments that administer social services. Unfortunately, the same incentives operate when the government manufactures guns as they do when it provides butter. For instance, although food stamp and public housing programs are ostensibly designed to benefit the poor, the biggest recipients of their welfare are probably the respective large agricultural corporations and housing contractors that profit from them. Similarly, most of the recent defense budget increases have little to do with fighting terrorists and more to do with providing welfare for politically connected defense contractors. These weapons makers, with the help of their congressional representatives, have cashed in on the post-9/11 climate of fear that has gripped the nation.

Congressional representatives know that highly organized recipients of government largesse will vote and contribute to political campaigns more than the dispersed, unorganized payers of the bill. So government programs -- whatever their nature -- essentially transfer wealth from the less politically connected to the more politically powerful. Many conservatives agree with such “public choice” analyses on domestic programs but naively believe that all government spending on defense is for legitimate purposes of national security. This is hardly the case. The defense budget is rife with weapon systems that are unneeded, perform poorly, or were designed to fight the now defunct Soviet Union.

The average taxpayer -- whether a hawk, a dove, or somewhere in between -- should ask how these white elephants are contributing to countering the main threat—al Qaeda. They do not. They merely provide welfare for constituent industries and unions that are far from poor. In fact, buying these unneeded systems takes money away from less glamorous, but more urgent, security needs-for example, armor for personnel and vehicles. Merely throwing wads of cash at the politicized security bureaucracies does not ensure that the troops or the nation is protected.

WHAT IS HAPPENING NOW THAT REALLY IS IMPORTANT?

The holiday season is a time for reflection. For those of us with an historical bent this reflection concerns what is happening in the world. Today’s headline will be forgotten in a couple of months. The year’s big story may well be a footnote in history. But what is happening now that really is important? What will be affecting lives for years and centuries to come? Certainly the big story of the day is the war on terrorism and its manifestation in Iraq. Will this story have legs into the 22nd century? As the big story may turn out to be a dead end, what we historically minded would really like to know is the small overlooked story that will be prominent in the history books one hundred, or even a thousand years from now. For example, I suspect the Rome Times had the story “Judea’s Herod Looks for Insurgent Child” buried on scroll 19.

Much of human history, the big stories, have related to the Four Horsemen of the Apocalypse. They ride angry and wild bringing destruction and death. However there is a positive, quiet, constructive story that is not usually news but has much more important and lasting impact. What I believe will become a big story of our time is going on in China and India. Over the last quarter century or so a transformation has occurred and continues to proceed. Hundreds of millions of people have been allowed to lift themselves out of poverty. Tens of millions more have moved into the middle class. The data describing this incredible event was compiled by the World Bank (PDF file) -- usually not a reliable organization.

Why did such a transformation take place? A small group of men, the leaders of these two countries, did not declare a war on poverty. On the contrary, the self-proclaimed communists and socialists simply unchained, the chains being socialism, the Four Horsemen of Abundance. They are Free Capital, Free Labor, Free Trade, and their leader Profit, the critical guide to the creative path. The horses are not wild stallions, they do not trample. No, they are draught horses that work for mankind to pull the multitudes out of poverty. What is more, this economic tsunami spreading the division of labor has not only benefited the people of Asia. The flood of inexpensive, well made goods into the United States has been a boon for almost everyone here.

This is not an unprecedented event. Europe and the United States have reaped the harvest of their work over the last two centuries. The great potential for future work lies in Africa and South America. It seems that the false prophets of economics, the socialists in all of their flavors, have been silenced. If we were naming the economic destroyers of today, the evils that mire people in poverty around the world, the Four Horsemen of Economic Apocalypse, War is again prominent. The others are Welfare, Regulation (domestic and international, i.e., protectionism), and perhaps the most insidious of all, Fiat Money. Fiat Money makes all the evils of government intrusion on liberty and capitalism more likely. In this holiday season, and every other day, we should count our blessings due to the Four Horsemen of Abundance and be vigilant for the Four Horsemen of Economic Apocalypse. This is accomplished practically by understanding historical significance.

THE JUBILANT ANARCHY OF LOONEY TOONS

Modern cartoons, the ones I used to watch on Saturday morning, just plain stink, with the exception of Spongebob Squarepants. But I still watch those old Warner Brother’s Merrie Melodies and Looney Toons, those exuberant and wonderful ones created by that genius, Chuck Jones. Thank God for modern technology and DVDs. They are why I can tell modern cartoons to go away, get lost, I do not have any use for you.

My view is that all good artists are basically anarchists, or conservatives in the true sense, or a combination of both. It is the bad artists (if you can call them artists), like Karl Marx and Adolph Hitler, who are the socialists. I sometimes wonder if the fact they were frustrated artists was not part of their problems, and therefore ours. Marx wanted to be a poet, and Hitler an architect. Neither had enough talent. These bad artists are the main reason Saturday morning cartoons are so crummy: they are socialist and boring, especially when they are about Evil Capitalists Polluting the Planet, for example. It is bad art in the service of bad political science.

Those Merrie Melodies and Looney Toons ... now those are wild, jubilant, anarchistic stories! They are the best cartoons ever made. There is nothing in any of them about the wonders of the State and how it can take care of you from cradle to grave. Any of the characters who appear to have even a vague resemblance to a politician is treated as a buffoon, like Foghorn Leghorn, or insane, like Marvin the Martian. One of the things, among many, that impresses me about these cartoons is that there really are no purely evil villains in them, be it Yosemite Sam or the Tasmanian Devil or Marvin. They might be more nuts than sane, even if they appear sane (like Marvin), they might even be frothing-at-the-mouth lunatics (like Sam or the Devil) but none of them are pure evil, which is how people are in real life, even if we like to comfort ourselves with such simplistic views.

There are no real heroes, either. Bugs Bunny is a perfect example of perhaps the oldest archetype of all, the Trickster, but he is no Superman or Batman. He is just a smart-aleck rabbit who has to outsmart those stronger or crazier than he is. I find his attitude in dealing with the State to be the best one: it is stronger than any one individual, so you have to outsmart it. Bugs may not exactly be a hero, but you could call him wise. He does not really seem to be afflicted with any of the Seven Deadly Sins -- he does not hate, or rage, or envy, unlike Sam and Taz or Daffy, all of whom seem more than a tad angry, or Marvin, who is a walking example of hubris. As for Bugs, his Trickster archetype would not have lasted for thousands of years if there was not wisdom in it.

IS THE FREE STATE PROJECT A REVOLUTIONARY PLAN OR A PIPE DREAM?

It is not often that libertarians are enough of a threat to anyone else’s interests that they generate protests. But that is what has been happening in New Hampshire lately. In June, 200 residents showed up at a heated town meeting in tiny Grafton township to challenge a trio of libertarian activists they feared were trying to conquer their community. Less than a week later, a squad of protesters picketed a fund-raising dinner in Plymouth, featuring Republican Governor Craig Benson, sponsored by the New Hampshire Liberty Alliance. Both protests were triggered by the Free State Project, or FSP, a recently hatched plan for libertarians to roll back the government of New Hampshire and thus create a flagship for a freer America.

The FSP is the brainchild of a 27-year-old political science instructor named Jason Sorens. The Yale lecturer’s idea is both simple and grandiose: Given libertarians’ eternal lack of political traction as a thinly spread minority, their most realistic chance to wield political power is to congregate in one state. Sorens figured it would be best if the state had a population below 1.5 million and a political culture already sympathetic to libertarian thinking. Sorens had studied small separatist and decentralist movements such as the Mormons and the Parti Quebecois. He became fascinated by recent successes in devolved local control in Wales, Scotland, and Spain, and decided that, when it comes to effecting radical political change, smaller localities, not huge federal states, are where the action is. He identified 10 American states where he thought 20,000 libertarians could make significant strides toward such goals as lowering taxes, achieving school choice, and creating more vibrant and decentralized local authorities. In September 2003 FSP pledgers voted on their favorite. New Hampshire, whose slogan is “Live Free or Die”, won by a 10 percentage-point margin over second-place Wyoming. Beyond matters of inchoate political culture and tradition, New Hampshire has a good head start on many specific issues important to libertarians.

As peculiar and radical as it might seem when you first hear about it, the FSP has received widespread, serious attention in the media. The New York Times ran a respectful 1,500-word piece about it last October. Playboy has given the Porcupines props, as has Reader’s Digest, which seems to indicate an impressively wide appeal. To be sure, it is a lot easier to garner favorable press reports than it is to get people to actually schlep to an often brutally cold, sparsely populated state. But whether or not the FSP ever hits its target membership goal, much less turns New Hampshire into a libertarian paradise, it retains real significance as a thought experiment. It forces people to confront the reality of how much they are willing to sacrifice for their notions about political liberty -- and how much people with different grievances against government might have in common.

The Free State Project is the most recent and successful face of libertarian separatism -- or, as some call it, libertarian Zionism. Ever since Ayn Rand presented the self-sufficient, regulator-free paradise of Galt’s Gulch in her 1957 epic Atlas Shrugged, people have periodically popped up to sell the idea that the only sure path to liberty is for libertarians to gather together in close proximity. Then no one would mooch or rob or force paper fiat money on their fellows. Sorens’s originality lies in his common sense, seemingly feasible suggestion about how to act on this impulse. His predecessors never quite managed that.

Despite any head start they might have, Sorens recommends that Porcupines take things slowly upon moving to New Hampshire. Some heated opposition to the FSP is already evident, provoked by a splinter group called the Free Town Project, which advocates that Porcupines concentrate themselves in Grafton, which already lacks most local regulations. Radical talk on Web sites and listservs associated with the Free Town Project got some locals riled enough that one mailed an anti-FSP flier to everyone in Grafton. Sorens’ expressed wishes are less extreme but still radical. He speculates about ordering federal law enforcement agents out of localities, for example. But unlike in Grafton, which has a population of only 1,000 or so, there is little risk that the FSP will “flood” the whole state.

Despite rhetoric from Porcupines about how their move is easy compared to the difficulties that early migrants to America faced crossing the oceans in search of liberty, most Americans, even most libertarians -- assuming they manage not to run afoul of drug laws, eminent domain, or IRS prosecutions -- just do not feel so tyrannized on a day-to-day basis that they feel an urgent need to uproot themselves. So who are these people ready to move to New Hampshire for political reasons? The people I met and talked to in the Free State movement are varied, but not all that varied. They are overwhelmingly white and white-collar, though not very wealthy. What they do not have in common is horror stories about state persecution that ruined their lives. A zoology student with a Green Party background hopes the Free State will be a more genuinely communitarian world, one where people have to cooperate to meet the social needs government now tries to meet. While most rebel at the notion when I float it, the Free Staters’ disgust with the state seems more theoretical and philosophical than experiential -- though the desire to more conveniently homeschool their children and have less of their income snatched are motivations for many.

The major problem with the notion that the FSP will bring liberty in our times to New Hampshire is that many of America’s tyrannical impositions, from the most evil to the most petty, come from the federal level. And the FSP is very vocally not a secessionist movement. Thus, what the FSP can achieve even in a best-case scenario is limited. We have seen what the feds think of states that try to relax their drug laws. How would the No Child Left Behind president deal with an attempt to end mandatory public schooling -- or to dodge a new military draft? In response to the question of whether the FSP idea really can work, Sorens says that in effect it already has -- just not with libertarians. Vermont has, since the 1960s, evolved from the home of rock-ribbed Yankee conservatism to the home of Ben & Jerry’s, self-described socialist U.S. Congressman Bernie Sanders, and Howard Dean. The hippies and the crunchies and the liberals targeted Vermont, Sorens claims, using as evidence an April 1972 Playboy article. “The whole American experience is based on migrating for freedom,” he rightly notes.

The example of the Mormons could cheer the Porcupines. They migrated en masse to a state and succeeded in dominating its political culture for the long haul. But when they rubbed up too hard against the feds, they abandoned one of their key practices, polygamy. A similar fate for the Free Staters seems likely -- perhaps some significant moves in tax and service cutting in New Hampshire, but a fully libertarian society stillborn under the watchful eye of federal tyranny. And it may well be that libertarian separatism is still too eccentric to win over tens of thousands. Still, history is not always predictable, and funny things can happen when people have something specific to rally round. The FSP experiment is opening up paths of communication to, and between, people who have not normally been likely to embrace the libertarian political message. Common understanding might not be as romantic as life on a liberated oil platform, but it is a vital step toward making the many sorts of people who are disenchanted with statism realize that they already live together on an island, one that will be liberated only if they fight together.

RETHINKING AMERICAN HISTORY, COMPLETELY

Thomas Woods’s superb new book has already achieved fame as the first Austrian-inspired book to be on the New York Times bestseller list in many years. It also delivers much more than it promises. Woods offers his book as a guide to “those who find the standard narrative or the typical textbook unpersuasive or ideologically biased”. This suggests that Woods has principally students in mind as his audience, but many others will benefit from reading the book. Woods displays a remarkably broad knowledge of the latest specialized research on various episodes of American history. This permits him, again and again, to raise illuminating points that will instruct even knowledgeable readers.

The book is no mere compilation of surprising facts. Woods has rather organized his account around a central theme. Americans have, from the colonial period to the present, flourished so long as they lived in a free economy, accompanied by a government strictly limited in powers. But throughout much of our history, the efforts of Americans to live freely have confronted a formidable enemy: the Leviathan state. Woods shows that the federal government, far from being the protector of the rights of minorities, has been the main obstacle on the path to liberty. But, one might object to this account, was not the American settlement conceived in sin? How can one say that Americans always sought to live freely when the earliest Puritan settlers began their “free” society by theft of Indian lands?

Woods meets this initial challenge head on. The Puritans did not steal from the Indians. They bought land from various tribes, in willing and beneficial exchange. “[W]hile the king had issued colonial land grants, the Puritan consensus ... was that the king’s charter conferred political and not property rights to the land, which Puritan settlers sought by means of voluntary cession from the Indians. The colonial government actually punished individuals who made unauthorized acquisitions of Indian lands” (p. 8). This is one of the many myths today passing for American history that his stimulating book helps to correct.

DO YOU THINK I COULD GET AWAY WITH VERY QUIETLY REVERSING MY PRO-WAR POSITION?

I noticed in a recent conversation with an old friend that I am no longer a foaming-at-the-mouth warhawk. I expressed a sentiment that I was still “on the fence” about the issue. I believe that I have now come down from the fence, and am merely taking my time about saying good-bye to it. I am a libertarian, and libertarians are anti-war. Pretty much as a rule. But seeing as I was convinced of the libertarian philosophy some time after reading Atlas Shrugged, and Randians are quite voraciously in favor of the war, it makes sense for me to be somewhat conflicted. The authors at the Ayn Rand Institute, however, hold a tenuous position, as we can see summed up in paradoxical statements such as the one telling us that the solution in Iraq is “to start forcefully asserting our principle of individual freedom”. How exactly can you force someone to be free?

Rand’s disciples are not viewing things objectively, rather, they have set their sights on a supposedly expedient solution and sacrificed the principles they claim to follow on its altar. In fact, it is America that is not acting rationally. And why should it? America is not rational. America is not human. Rand’s principles apply to individuals. If America was an individual we could very well expect it to behave rationally. However, America is simply a name -- a concept, a golden calf, a collective noun. As Rand demonstrates, collectives rarely if ever attain rational results -- they are much more likely to drive competent individuals to antisocial behavior, punish success, and reward theft and deceit.

The Objectivist position in favor of war contradicts Objectivism itself, in many ways. The one way in which it does not is in Objectivism’s disregard for human life. Individuals are just pawns in the struggle between the right principles and the wrong ones. To me, this seems like a pretty backward way of looking at things -- after all, principles mean nothing without someone to hold them. The battleground of principles should accordingly be within the individual mind. The failings of the Objectivist case for war aside, I come now to my reasons for having supported the war in Iraq.

I do not know what America can do to rectify its current foreign policy problems. No one does. I do know that America is separated from Iraq by many, many miles of ocean, and that we could defend our coasts at a fraction of the cost of intervening preemptively in other regions. I do not think it is right to sit by and watch while atrocities and genocides go on around the globe, but I no longer believe that the State can offer a viable alternative, especially if that alternative is more atrocity and more genocide. Evaluating what is right and what is wrong is important for individuals. However, for the State the evaluation should be can and cannot. Can the State bring peace, prosperity, and liberty to Iraq in the least costly (in terms of time, money, and human life) way possible? No, it cannot. Can the State solve all the world’s problems? No, it cannot. It cannot even solve the problems of its own citizens. It cannot provide affordable, high-quality transportation, health care, education, or utility service.

I have learned in the past year that regardless of morality, regardless of extenuating circumstances, regardless of personal philosophy, the State is not an appropriate tool to further a personal agenda. No matter how good or bad the agenda is, the State will make a mess of it. I think that people in Iraq should have a fair chance to rebuild their own peace and prosperity -- I even think they should be compensated for what was stolen from them -- but I no longer believe that the State can do it – whether it is America, the U.N., or the fabled Iraqi democracy.

TRAFFIC TEACHES

In general, I am not a fan of traffic. I have been known to drum my fingers on the steering wheel, and mutter to myself, if I am not moving within a few seconds of the light turning green. My opinion of the old fool lollygagging in the passing lane is highly unfavorable, even if that “old fool” is, probably, a few years younger than me. But despite the ineptitude of the average motorist, which, in traffic, is multiplied by a factor of a hundred or more, people get where they want to go. Moreover, they do it day after day, year after year, with rarely an accident, and almost never a serious one. And, most wonderfully, they do it in a state of virtual anarchy.

Indeed, anarchy is my point. I have not researched traffic laws, because it would not make any difference in the way I drive, but I am sure there are lots of them. Of course, we all know that there are posted speed limits, but most motorists have the good sense to substitute their own judgment as to proper speed. There are probably “laws” regarding passing, using signals, honking, and headlights, but it is a safe bet that few people know them, or care about them. Yet they manage to get from here to there safely! This is what I explain to people who recoil with shock as my suggestion that the best government is no government at all. “What?” they say. “Who is going to make sure our airplanes are safe?” (Well, how about the airlines, which have a lot more at stake than the government) “Who is going to guarantee pure foods and drugs?” (How about the people who produce and use them? Again, they are the ones with something to lose) But mainly, I like to point to traffic.

Stand alongside a busy road during rush hour. Hundreds, maybe thousands, of cars will pass, in both directions, and often at fairly high speeds. How many will crash? Thousands of cars are driving at high speed and in close proximity, with nothing to prevent collisions but lines painted on the road! Government might as well not exist. People are managing their own affairs remarkably well on their own.

THE REALITY OF RED-STATE FASCISM

Year’s end is the time for big thoughts, so here are mine. The most significant socio-political shift in our time has gone almost completely unremarked, and even unnoticed. It is the dramatic shift of the red-state bourgeoisie from leave-us-alone libertarianism, manifested in the Congressional elections of 1994, to almost totalitarian statist nationalism. Whereas the conservative middle class once cheered the circumscribing of the federal government, it now celebrates power and adores the central state, particularly its military wing. This huge shift has not been noticed among mainstream punditry, and hence there have been few attempts to explain it -- much less have libertarians thought much about what it implies. My own take is this: the Republican takeover of the presidency combined with an unrelenting state of war, has supplied all the levers necessary to convert a burgeoning libertarian movement into a statist one.

The remaining ideological justification was left to, and accomplished by, Washington’s kept think tanks, who have approved the turn at every crucial step. What this implies for libertarians is a crying need to draw a clear separation between what we believe and what conservatives believe. It also requires that we face the reality of the current threat forthrightly by extending more rhetorical tolerance leftward and less rightward.

The 1994 revolution failed of course, in part because the anti-government opposition was intimidated into silence by the Oklahoma City bombing of April 1995. The establishment somehow managed to pin the violent act of an ex-military man on the right-wing libertarianism of the American bourgeoisie. It was said by every important public official at that time that to be anti-government was to give aid and support to militias, secessionists, and other domestic terrorists. It was a classic intimidation campaign but, combined with a GOP leadership that never had any intention to change DC, it worked to shut down the opposition. In the last years of the 1990s, the GOP-voting middle class refocused its anger away from government and leviathan and toward the person of Bill Clinton, culminating in a pathetic and pretentious campaign to impeach him.

This event crystallized the partisanship of the bourgeoisie, driving home the message that the real problem was Clinton and not government; the immorality of the chief executive, not his power; the libertinism of the left-liberals and not their views toward government. The much heralded “leave us alone” coalition had been thoroughly transformed in a pure anti-Clinton movement. The right in this country began to define itself not as pro-freedom, as it had in 1994, but simply as anti-leftist, as it does today. There are many good reasons to be anti-leftist, but let us revisit what Mises said in 1956 concerning the anti-socialists of his day. He pointed out that many of these people had a purely negative agenda, to crush the leftists and their bohemian ways and their intellectual pretension. He warned that this is not a program for freedom. It was a program of hatred that can only degenerate into statism.

A positive agenda of liberty is the only way we might have been spared the blizzard of government controls that were fastened on this country after Bush used the events of 9-11 to increase central planning, invade Afghanistan and Iraq, and otherwise bring a form of statism to America that makes Clinton look laissez-faire by comparison. The Bush administration has not only faced no resistance from the bourgeoisie -- it has received cheers. And they are not only cheering Bush’s reelection; they have embraced tyrannical control of society as a means toward accomplishing their anti-leftist ends. After September 11, the very people who once proclaimed hated of government now advocate its use against dissidents of all sorts, especially against those who would dare call for curbs in the totalitarian bureaucracy of the military, or suggest that Bush is something less than infallible in his foreign-policy decisions. The lesson here is that it is always a mistake to advocate government action, for there is no way you can fully anticipate how government will be used. Nor can you ever count on a slice of the population to be moral in its advocacy of the uses of the police power.

If you follow hate-filled sites such as Free Republic, you know that the populist right in this country has been advocating nuclear holocaust and mass bloodshed for more than a year now. The militarism and nationalism dwarfs anything I saw at any point during the Cold War. It celebrates the shedding of blood, and exhibits a maniacal love of the state. The new ideology of the red-state bourgeoisie seems to actually believe that the U.S. is God marching on earth -- not just godlike, but really serving as a proxy for God himself. Along with this goes a kind of worship of the presidency, and a celebration of all things public sector. It longs for the state to throw its weight behind institutions like the two-parent heterosexual family, the Christian charity, the homogeneous community of native-born patriots.

Paul Craig Roberts is right: “Even Christians have fallen into idolatry. There appears to be a large number of Americans who are prepared to kill anyone for George Bush.” And, “Like Brownshirts, the new conservatives take personally any criticism of their leader and his policies. To be a critic is to be an enemy.” In short, what we have alive in the U.S. is an updated and Americanized fascism. Why fascist? Because it is not leftist in the sense of egalitarian or redistributionist. It sees the state as the central organizing principle of society, views public institutions as the most essential means by which all these institutions are protected and advanced, and adores the head of state as a godlike figure who knows better than anyone else what the country and world’s needs, and has a special connection to the Creator that permits him to discern the best means to bring it about.

The American right today has managed to be solidly anti-leftist while adopting an ideology -- even without knowing it or being entirely conscious of the change -- that is also frighteningly anti-liberty. This reality turns out to be very difficult for libertarians to understand or accept. For a long time, we have tended to see the primary threat to liberty as coming from the left. But we must also remember that the sweep of history shows that there are two main dangers to liberty, one that comes from the left and the other that comes from the right. Europe and Latin America have long faced the latter threat, but its reality is only now hitting us fully.

What is the most pressing and urgent threat to freedom that we face in our time? It is not from the left. If anything, the left has been solid on civil liberties and has been crucial in drawing attention to the lies and abuses of the Bush administration. No, today, the clear and present danger to freedom comes from the right side of the ideological spectrum, those people who are pleased to preserve most of free enterprise but favor top-down management of society, culture, family, and school, and seek to use a messianic and belligerent nationalism to impose their vision of politics on the world. There is no need to advance the view that the enemy of my enemy is my friend. However, it is time to recognize that the left today does represent a counterweight to the right, just as it did in the 1950s when the right began to adopt anti-communist militarism as its credo.

“Right wing” sentiments from 10 years ago are today regarded by the right as treasonous. What should this teach us? It shows that those who saw the interests of liberty as being well served by the politicized proxies of free enterprise alone, family alone, Christianity alone, law and order alone, were profoundly mistaken. There is no proxy for liberty, no cause that serves as a viable substitute, and no movement by any name whose success can yield freedom in our time other than the movement of freedom itself. We need to embrace liberty and liberty only, and not be fooled by groups or parties or movements that only desire a temporary liberty to advance their pet interests.

There has never in my lifetime been a more urgent need for the party of liberty to completely secede from conventional thought and established institutions, especially those associated with all aspects of government, and undertake radical intellectual action on behalf of a third way that rejects the socialism of the left and the fascism of the right. Indeed, the current times can be seen as a training period for all true friends of liberty. We need to learn to recognize the many different guises in which tyranny appears. Power is protean because it must suppress that impulse toward liberty that exists in the hearts of all people. The impulse is there, tacitly waiting for the consciousness to dawn. When it does, power does not stand a chance.