Educate Yourself

Week in Review
For the week 7/24/2006 - 7/28/2006
Brian Trumbore
President/Editor, StocksandNews.com

"The consensus in Israel, the U.S. and parts of Lebanon and the Arab world is that Hizbullah recklessly triggered the Israeli rampage in Lebanon this month by kidnapping two Israeli soldiers, causing all the Lebanese to pay a very heavy price. This will be debated for a long time, and supporters of a more truthful picture of reality would argue that the kidnapping of the soldiers is only the latest move in a long-running war between Israel and Lebanon, not a sudden unilateral action.

"However, a more compelling question is being asked now: Why do the U.S., Europe and much of the Arab world allow Lebanon to be pulverized by Israeli bombs when most of those same people in the West last year held Lebanon up as a beacon of democratic change; a model for other Arabs?

"We now have two Arab countries that Bush has trumpeted as models and vanguards of America's policy of promoting freedom and democratic change; Iraq and Lebanon. Neither is a very comforting sight today. Not many Arabs will sign up for Bush's democracy and freedom plan if this is what they will expect to happen to their countries."

"American officials are very good at vernacular descriptions, but lousy at history and political reality in the Middle East. As U.S. Secretary of State Condoleezza Rice sets off Sunday on her short trip to a Middle East that is increasingly engulfed in violent confrontations and political turmoil, she has described the massive destruction, dislocation and human suffering in Lebanon as an inevitable part of the 'birth pangs of a new Middle East.'

"From my perspective here in Beirut, watching American- supplied Israeli jets smash this country to smithereens, what she describes as 'birth pangs' look much more like a wicked hangover from a decades-old American orgy of diplomatic intoxication with the enticements of pro-Israeli politics.

"We shall find out in the coming years if indeed a new Middle East is being born, or - as I suspect - we are witnessing the initial dying gasps of the Western-made political order that has defined this region and focused primarily on Israeli national dictates for most of the past half-century. The way to a truly new and stable Middle East is to apply policies that deliver equal rights to all concerned, not to favor Israel as having greater rights than Arabs?..

"The numbing fact that Bush-Rice fail to acknowledge?is that Washington now can only speak to a few Arab governments (in Saudi Arabia, Egypt and elsewhere) who are in almost no position to impact on anyone other than their immediate families and many guards.

"Washington is engaged almost exclusively with Arab governments, whose influence with Syria is virtually nonexistent, whose credibility with Arab public opinion is zero, whose own legitimacy at home is increasingly challenged, and whose pro- U.S. policies tend to promote the growth of those militant Islamist movements that now lead the battle against American and Israeli policies. Is Rice traveling to a new Middle East, or to a diplomatic Disneyland of her own imagination?"

"As Lebanon was recovering from a year of cruel assassinations and explosions, it was hit this month yet again by another confrontation with Israel. The year 2005 saw the murder of former Prime Minister Rafik Hariri and a score of other personalities and bystanders, the mysterious bombing of several civilian targets, and a decline in economic growth to almost nil.

"However, no one would have imagined that Hizbullah's border incident with Israel could spiral into a catastrophic escalation of violence that would give millions of people in Lebanon only a few hours to run away or seek shelter. The depth of the current crisis is exemplified by the fact that in a matter of 48 hours Israel destroyed much of Lebanon's major roads and infrastructure, a feat that took the Israelis weeks to do in 1982?..

"July 2006 will enter the annals as another episode in a series of Israeli attacks against Lebanon that started in 1968?.While Israel waged raids and mini-wars and one major war in 1982 against the Palestinian organizations and later against Hizbullah, it never spared civilian installations and economic infrastructure (roads, bridges, power and water stations, communications), hospitals and schools, manufacturing and commercial establishments and the like."

"After aggressively supporting Israel's siege of Lebanon - a brutal military campaign that has threatened the very existence of the Lebanese state - U.S. Secretary of State Condoleezza Rice came to Beirut to profess American 'support' for the Lebanese government. Rice's arrival in Beirut - but failure to demand an immediate cease-fire - was not seen by many here as a sincere show of concern for their alarming humanitarian situation?.

"Throughout this crisis, Rice has been right about one thing: that it would be pointless to resolve the current conflict in a way that will only bring us back to the same situation in six months' time. She is right that any lasting truce will require a dramatic change in the Lebanese-Israeli status quo. But the status quo is likely to deteriorate further without a cease-fire and will never improve until all of the core causes of the conflict are addressed.

"In this sense, it is promising that Rice's talk addressed the whole package of concerns that have long plagued the Lebanese- Israeli front. These issues include Israel's air, land and sea incursions into Lebanese territory, which have occurred nearly every day since its withdrawal from South Lebanon in 2000; the decades-long occupation of the Shebaa Farms; and the detention of Lebanese citizens in Israeli jails."

"What is it that needs to be solved to stop the clashes, and why is this war taking place? That is a rudimentary question, but an increasingly relevant one, given the slow shift toward diplomacy, especially with the meeting in Rome on Wednesday of the U.S. and European and Arab parties.

"Three concentric circles of confrontation are self-evident in the Lebanon-Israel situation: the immediate Lebanese-Israeli clash; wider regional confrontations involving Syria, Iran, Palestine, Israel and Arab leaders in Egypt, Jordan and Saudi Arabia who seem to fear Shiite empowerment; and a global confrontation between a U.S. that seems to want to revamp the Middle East region to suit American-Israeli preferences, and regional governments and popular forces that resist such hegemonic aims politically and militarily. Any successful attempt to quell the Lebanon-Israel clashes must consider which of these three is the most important problem to be resolved, or victory to be earned at the negotiating table rather than on the field of battle. A sure recipe for failure would be to lump all three circles together and hopelessly confuse a narrow bilateral dispute with the larger regional and global confrontations?.

"The purely bilateral issues are few, and clear: Israel wants its two captured soldiers returned alive, and not to be attacked by Hizbullah rockets from southern Lebanon. Lebanon and Hizbullah wants Israel to stop bombing Lebanese targets, leave the Shebaa Farms area it still occupies, return the very few Lebanese prisoners it holds, and stop menacing Lebanon and intruding on its sovereignty by over-flights, sonic booms, and occasional attacks?.

"If such an accord offered a sense of victory for both sides - diplomacy's ideal outcome - this would subsequently prod progress on the second circle, the Arab-Israeli conflict. Achieving an Israel-Lebanon cease-fire and permanent calm, on the basis of international law and mutual rights, implemented simultaneously, would have enormous positive implications for progress on wider regional and global issues."

"Israel, with the blind support of the United States, has insisted that a cease-fire must be delayed until its military can inflict meaningful damage upon Hizbullah. The Israelis believe that by bombing Lebanon back 20 years, Hizbullah will be weakened. But so far, Israel's unimaginative military campaign has had the opposite effect. Support for Hizbullah - which was limited before the war - has reached record highs in Lebanon and around the region, with each atrocity only adding to the ranks of angry people who would like to see Israelis suffer retribution. And as Hizbullah gains strength, the Lebanese state - an entity that will be necessary for any political process that would restore calm along the border - is being systematically weakened?.

"The Lebanese people will be weighing Washington's words and actions very carefully in the coming days to see whether the 'urgent' effort to secure a cease-fire promised by U.S. Secretary of State Condoleezza Rice will actually materialize. If this promise was merely a ruse to prolong the destruction of Lebanon, then the Lebanese had better prepare themselves for a different vision of their future. The 'new Lebanon' could end up looking more like an Islamized Somalia than the free and democratic country that was recently held up as a shining example by the Bush administration. If that should be the fate of Lebanon, then the Israelis ought to also prepare themselves for a different future: one of perpetual violence and instability along their border."

"Since Israel's unilateral withdrawal in 2000 to an internationally recognized border, Hizbullah has established in Lebanon a terror state-within-a-state, and, working on behalf of Iran and Syria, it has sought to undermine the emergence of a free and democratic Lebanon. In crossing an international border, murdering and kidnapping Israeli soldiers and firing rockets at Israeli cities, Hizbullah has also committed blatant acts of war. Like any nation exercising its right of self-defense, Israel is responding not only to the specific incidents that occurred but is also working to eliminate the threat posed by this clear and present danger."

"Whether or not the IDF Chief of General Staff Lt.-Gen. Dan Halutz really issued a directive to the air force to bomb 10 multistory buildings in south Beirut for every salvo of rockets fired at Haifa, the question of the price Israel should be exacting from Hizbullah and Lebanon in retaliation for the bombardment of its civilian population and what is a proportionate response remains a potent one?.

"(Maj.-Gen. Uzi) Dayan says, 'We have to make a distinction between Lebanon and exacting a price from Hizbullah. But also with Hizbullah, the price is immaterial; they are willing to fight to the last Lebanese, especially if he's a Christian. Hizbullah will not be deterred and that's why the price we have to exact from them is denying them the strategic capability to fire medium- and long-range missiles at Israel.'?.

"(Prof. Uzi) Arad, who was strategic adviser to prime minister Benjamin Netanyahu and before that head of research in the Mossad, says, 'Deterrence doesn't really work in a conventional situation. The question is how much pain you're prepared to sustain and the amount of damage you can inflict. Only when nuclear weapons are involved can you really say that it's an unbearable price, and that's why the superpowers had a policy of mutually assured destruction during the Cold War; that was classical deterrence.'

"Arad explains that from Israel's point of view, 'deterrence mainly means denying the other side the capability to attack us. There are two stages: the first is convincing the enemy that if he tries to attack, he'll fail. The second is that even if he succeeds, he will be forced to pay such a high price that it won't be worthwhile.'"

"Clearly the present campaign to root out Hizbullah has created a greater sense of Israeli unity than at any time since the Six Day War?.

"Our adversaries no longer even bother to go through the pretense that the conflict is related to land for peace. Hizbullah and Hamas, backed by the Iranians and Syrians, seek the elimination of Jewish sovereignty - nothing less.

"We are not attacking Lebanon. We are attacking Hizbullah, which has stuck itself like a leech on the Lebanese people. They are terrorists with lethal hi-tech weapons who believe they are sanctified to ravage our sovereign territory in order to kill and kidnap civilians and soldiers?.

"And whereas decent nations at war may seek to minimize casualties of innocent non-combatants, to relate to 'proportionality' in this context can only be described as playing foul?.

"This could represent the beginning of a campaign to reverse the global tide of media demonization and bias confronting us.

"History may make us grateful that the Hizbullah offensive took place now rather than in a few years' time, when the price in blood would undoubtedly be much higher. Our challenge is to guarantee that the bloodshed and the sacrifices our people are currently making will not be in vain and will result in a more secure Israel.

"Even more serious, however, is the proposal that Hizbullah's disarmament be conditioned on an Israeli withdrawal from Shebaa Farms, thereby rendering meaningless the UN's own certification, just six years ago, that Israel had withdrawn from every last inch of Lebanese territory.

"This certification, unanimously issued by the UN Security Council following Israel's pullout from Lebanon in May 2000, was based on the recommendation of UN experts who carefully studied old maps of the border and compared them to Israel's withdrawal line.

"However, Hizbullah rejected the UN's determination, claiming that an additional bit of land, Shebaa Farms, was also Lebanese (the UN experts deemed this land Syrian). Therefore, it announced, it had every right to continue attacking Israel in order to 'liberate' Shebaa Farms.

"Successive Lebanese governments - both the former Syrian- controlled government and the new government elected following Syria's ouster from Lebanon - promptly backed this claim, and the international media followed suit: Within months, the UN determination that Shebaa Farms was not Lebanese had virtually disappeared from coverage of the region; instead, the area was referred to as 'disputed territory.'?

"If the international community gives into this Hizbullah blackmail it will decisively preclude peace in the Middle East for decades to come - because it will ensure that no deal is actually final. Instead, each agreement will merely be the starting point for a new round of territorial claims?.

"Thus unless the rest of the international community decisively rejects the idea of conditioning Hizbullah's disarmament and the Lebanese army's redeployment on an Israeli withdrawal from Shebaa Farms, the Lebanese cease-fire deal will prove the death knell of the Middle East for many years to come."

"(One) of the oldest lessons in international affairs is that not every problem has a neat solution. The first rule of foreign policy, as in medicine, should be 'Do no harm.' Unfortunately, the legacy of today's Lebanese adventure, like the 1982 Israeli invasion of Lebanon and our invasion of Iraq, may be plenty of strategic damage.

"Granted, there's a counterargument that fills my mailbox and goes like this: What else can a country do when it is subjected to rocket attacks and cross-border raids by a terrorist organization committed to its destruction? If that terror group finds a safe haven just across an international border, and the government and the army there cannot control it, then what other option is there but to destroy that menace?

"Uprooting Hizbullah may inadvertently cause some civilian casualties, so the argument goes, but the number would be unnoticed if the victims had died at the hands of an Arab government (so far, 1,000 times as many Muslims have died in Darfur as in Lebanon). In the end, sitting ducks have to fight back.

"One day before the Hizbullah incursion that provoked this war, terrorists bombed train lines in Mumbai, India, killing nearly 200 people (about 10 times as many as had been killed in all the Hizbullah attacks on Israel since the withdrawal from Lebanon in 2000, until this month). The Mumbai bombings were the latest in a string of attacks against India that had gone on for years, at the hands of terrorists operating with support from across the border in Pakistan.

"Many Indians complain that their prime minister, Manmohan Singh, has been too wimpish in responding?.Yet Mr. Singh has wisely recognized that military action would only make the problem worse.

"And there's another example. Israel itself, in the past. Under both Ariel Sharon and Ehud Barak, Israel responded with restraint to attacks by Hizbullah. That's one reason Hizbullah was on the defensive politically, and one reason Sunni Arab governments have criticized it?.

" 'Those of us who had welcomed Bush's vision of democracy in the Middle East still believe in the promise of a free Iraq and a free Lebanon,' The Daily Star of Lebanon wrote in an editorial on Monday. 'What a pity to see Bush's vision engulfed in the flames of the current shortsighted American foreign policy. What was once a dream of democracy is fast becoming a nightmare of unstoppable civil war and terror.'

"President Bush never became minutely engaged in Israeli- Palestinian negotiations or oversaw shuttle diplomacy to Damascus the way Bill Clinton did. It's true that the Clinton efforts in the end didn't achieve much. Nor did the dovish efforts of Barak.

"But we may end up nostalgic for American and Israeli diplomatic efforts that never accomplished much, for they work out far better than military interventions that leave us worse off than before."

"A U.S. government official put it to me this way. 'Israel's got the clock, but Hizbullah's got the time.' The sands of the hourglass favor the terrorists - every day they hold out and drop more rockets on Israel, Hizbullah scores a propaganda win.

"All Hizbullah has to do to achieve victory is not to lose completely. But for Israel to emerge the acknowledged winner, it has to shatter Hizbullah. Yet Israeli miscalculations have left Hizbullah alive and kicking.

"Israel has to pull itself together now, to send in ground troops in sufficient numbers, with fierce resolve to do what must be done: Root out Hizbullah fighters and kill them. This means Israel will suffer painful casualties - more today than if the Israeli Defense Force had gone in full blast at this fight's beginning.

"The situation is grave. A perceived Hizbullah win will be a massive victory for terror, as well as a triumph for Iran and Syria. And everybody loves a winner - especially in the Middle East, where Arabs and Persians have been losing so long.

"So why is defeating Hizbullah such a challenge? Israel smashed one Arab military coalition after another, from 1948 through 1973. Arabs didn't seem to make good soldiers.

"The answer's straightforward: Different cultures fight for different things. Arabs might jump up and down, wailing, 'We will die for you Saddam!' But, in the clinch, they don't - they surrender. Conventional Arab armies fight badly because their conscripts and even the officers feel little loyalty to the states they serve - and even less to self-anointed national leaders.

"But Arabs will fight to the bitter end for their religion, their families and the land their clan possesses. In southern Lebanon, Hizbullah exploits all three motivations. The Hizbullah guerrilla waiting to ambush an Israeli patrol believes he's fighting for his faith, his family and the earth beneath his feet. He'll kill anyone and give his own life to win.

"We all need to stop making cartoon figures of such enemies. Hizbullah doesn't have tanks or jets, but it poses the toughest military problem Israel's ever faced. And Hizbullah may be the new model for Middle Eastern 'armies.'?.

"Those of us who support Israel and wish its people well have to be alarmed. Jerusalem's talking tough - while backing off in the face of Hizbullah's resistance. Israel's on-stage in a starring role right now, and it's too late to call for a re-write?.

"Israel and its armed forces are rightfully proud of all they have achieved in the last six decades. But they shouldn't be too proud to learn from their enemies: In warfare, strength of will is the greatest virtue."

"Lebanese sources outlined for me the compromise package they say was discussed Monday when Rice met with Fouad Siniora, the Lebanese prime minister, and Nabih Berri, the parliament speaker and leader of the Shiite militia known as Amal. The cornerstone of this package, according to my sources, is that Hizbullah would agree to withdraw its armed fighters from south Lebanon and accept an international force there that would accompany the Lebanese army. Israel, for its part, would agree to halt its attacks and lift its air and sea blockade. The United States would call for negotiations over the return of a disputed territory known as Shebaa Farms, claimed by Lebanon even though the United Nations ruled in 2000 that it was Syrian?.

"Hizbullah's military power would be severely degraded under such a negotiated settlement, but it would remain intact politically. The Shiite militia is trying to put on a brave face, sending me an e-mail message yesterday through a Lebanese intermediary claiming that it has the upper hand. If a cease-fire isn't reached and Hizbullah fights on, it will 'accept a four-to- one casualty ratio,' the message warned. 'Human losses all go to heaven as martyrs with families and children handsomely compensated.' But for all this brave talk, statements by Hizbullah's leader, Hasan Nasrallah, seem to be defining victory as simple survival."

"The problem here is one of strategy. Hamas and Hizbullah are playing Israel like a fiddle. They knew that attacks on Israeli territory would draw a response of overwhelming force that would inflame their supporters - just the thing to shore up their own flagging standing with their base?.

"Ever emboldened, Iranian President Mahmoud Ahmadinejad appears convinced he can get his way by alternately outsmarting and bullying the world community. His government is marveling at its handiwork while busily moving forward with its nuclear program.

"But the world is watching the calamity in the region - and Iran's role in it. The realization may come that the only way to alter Tehran's destructive behavior may be through force, before it goes nuclear and becomes even more dangerous."

"The truth is that there is no reasonable compromise to be made with the extremists who began this war: Either they will retain an extra-governmental military force that can attack Israel whenever it suits the interests of the Iranian or Syrian regimes, or they will lose that capacity. If they are to lose it, then the Rome conference governments must be prepared to support realistic measures to achieve that result. Those need not only be military; just as important will be the effort to bolster the Lebanese government so that it attains the political strength and will to assert its authority."

"To stop and turn this dangerous historical shift in the military and political balance of power, Mr. Bush needs a plan to restore American power in the Middle East. He has to move across the board with creative diplomacy, a full-scale economic effort, and a new way to credibly exercise U.S. military might.

"The first step has to be an act of diplomatic jujitsu. Mr. Bush needs to use the present crisis to justify new and wide-ranging talks with Syria and Iran and, if necessary, indirectly with Hamas and Hizbullah. These rank at the top of the world's nastiest and most untrustworthy negotiating partners, but they also happen to be the ones causing most of the trouble - and are, therefore, the ones we have to deal with?.

"Mr. Bush and Ms. Rice are right to want a durable cease-fire, not just any cease-fire, and right to want a new Middle East, not this Middle East. But only American power can do this job, and hold back the radical tide and reverse it. For years now, Washington has compromised that power by fearing to exercise it fully. For Mr. Bush's first five years, it was either large-scale U.S. military force or nothing. Now, he has the opportunity to unleash American power in every dimension, letting the weight of diplomacy, money and arms reinforce each other, pitting American strengths against the radicals' considerable vulnerabilities. Our friends and allies wait for these actions, and will join us. Such an effort could also restore Mr. Bush's power and prestige for the tough decisions he will face in his last two White House years."

"The world hates George Bush more than any U.S. president in my lifetime. He is radioactive - and so caught up in his own ideological bubble that he is incapable of imagining or forging alternative strategies.

"In part, it is also because China, Europe and Russia have become freeloaders off U.S. power. They reap enormous profits from the post-Cold War order that America has shaped, but rather than become real stakeholders in that order, helping to draw and defend redlines, they duck, mumble, waffle or cut their own deals.

"This does not bode well for global stability. A religious militia that calls itself 'the party of God' takes over a state and drags it into war?.and the world is paralyzed. Those who ignore this madness will one day see it come to a theater near them?.

"When will the Arab-Muslim world stop getting its 'pride' from fighting Israel and start getting it from constructing a society that others would envy, an economy others would respect, and inventions and medical breakthroughs from which others benefit?

"There will be no new Middle East - not as long as the New Middle Easterners, like Rafik Hariri, the former Lebanese prime minister, get gunned down; not as long as Old Middle Easterners, like Nasrallah, use all their wits and resources to start a new Arab-Israel war rather than build a new Arab university; and not as long as Arab media and intellectuals refuse to speak out clearly against those who encourage their youth to embrace martyrdom with religious zeal rather than meld modernity with Arab culture.

"Without that, we are wasting our time and the Arab world is wasting its future. It will forever be 'on the eve of modernity.'"

U.S. Assistant Sec. of State David Welch: "(Americans) are now firmly in the picture and leading the diplomacy."

Chief of Staff Josh Bolten: "The president believes all freedom loving people deserve our support."

Secretary of State Condoleezza Rice to the people of Lebanon: "Thank you for your courage and steadfastness."

Israeli spokesman Mark Regev: "We have no interest in failed states?We want to see our neighbors move forward."

President George Bush: "We need to help the Siniora government in order to help democracy succeed."

Note to the above. Next time I feel like doing some work on my home, such as for a new kitchen or bathroom, I'd appreciate it if you would leave the wrecking ball at the plant.

I just don't understand the fantasyland so many of our leaders and their acolytes seem to be living in. I've always been in the pro-Israel camp, and remain so, but the fact is Lebanon is destroyed?and it can still get worse.

President Bush on Friday was talking of helping Lebanon rebuild. How do you even respond to a statement like that?

Yes, no sane analyst can question who started this mess? Hizbullah and Hamas. But there was no justifiable reason for destroying Lebanon's infrastructure. Ret. Gen. Barry McCaffrey and the aforementioned Ralph Peters both called it "mad" when appearing on "Kudlow & Co." For crying out loud, I could have done a better job picking out targets.

The people of southern Lebanon should have been given 48-72 hours to leave and then Israel could have moved in, full force. Bomb south Beirut, as Israel did, after giving at least 24 hours warning in that instance. When you go from the airport to the nicer part of the city, you pass through the Hizbullah ghettos on that super flyway you see that's been bombed in all the pictures. Totally understandable. But I was going through my own pictures of Lebanon, and my drive over the mountains into the Bekaa Valley, and I can't believe a spectacular suspension bridge, for example, was also bombed. I'll spare you other thoughts on this specific topic for now.

What you learned in the above commentaries, though, was this sudden interest in Shebaa Farms. I told you last week that was the key all along and President Bush, when it comes to the history of this episode, will forever go down as a failure for not caring a wit about Lebanon the past 12 months outside of holding it out as a model of what's possible in the Middle East.

I keep coming across things I've written in the past, like this gem which I didn't mention the past two weeks.

"Syria / Lebanon: Pitiful. The U.S. and its allies, particularly France, had a window of opportunity last spring with the removal of Syria's army and the Lebanese elections. Alas, because both the U.S. and France were afraid to confront Syria's President Bashar Assad, the window closed and the bombs and assassinations have resumed. For its part, Lebanon is too weak to confront Hizbullah's presence, and here Israel does the cause no favors when it continually violates Lebanese airspace beyond targeting Hizbullah along the disputed border."

What the heck was going on in the State Department? What were Bush's advisers saying? When someone shoved a note card in front of him and Bush talked of Lebanon, did anyone then tell him, "Mr. President, we still have a lot of work to do here before it explodes"?

Most pundits say, of course the White House is consumed with Iraq at the expense of all other issues, such as North Korea, Iran and now Lebanon.

But a solution has been staring us in the face. As more than one of the commentaries cited above noted, and as I did last week, Hizbullah has pinned its resistance on Shebaa Farms. The UN said the 100-square mile piece of land was Syria's, Lebanon claims it, and Israel kept it. Call Hizbullah's bluff, Israel. Give them Shebaa Farms. Let Lebanon then work it out with Syria.

Israel would then counter, 'But that only moves the missiles closer.' That's where the international peacekeeping force comes in, until such time (two years), as the Lebanese army has the clout to do the job on its own. Hizbullah then is left with becoming a political power, and with Syria's continuing backing would resort to terrorism, internally, I imagine. But then it's at least limited to Lebanon.

Of course for some of this it may already be too late. It's nonetheless where we're headed in future negotiations, though now we're still left with the fact Lebanon is destroyed and the Arab Street is more anti-American then ever.

To paraphrase Lloyd Bridges in the movie "Airplane," I sure picked the wrong week to call the Street a bunch of "idiots." But I stand by everything I write. It's your guarantee of quality.

After two weeks of fretting over the international scene, Wall Street chose to focus on itself, which more often than not it is wont to do.

And it spent time deciding that the U.S. economy is slowing and the Federal Reserve may be finished raising interest rates, so the heck with missiles and bombs flying across the Israel / Lebanon border, and Orcs slaving away, making nukes or nuclear fuel in North Korea and Iran. We'll get back to them later, on our own time, said the gamblers that easily make up more than 50 percent of the activity each day in our financial markets.

"The U.S. housing market will continue to stagnate in the first two quarters, with some regions seeing slight declines in value, but then things really begin to get dicey in the second half. I would call for an outright crash, with values down 20% or more in many areas, were it not for the fact that long-term interest rates will remain at benign levels for much of the year.

"The consumer will slow due to a creeping unease about their largest investment and excessive personal debt. Yes, I and many others have been saying this for years now, but for the first time during that period real estate is no longer going to be the piggybank it has been."

Where I was wrong was in forecasting that "major foreign policy issues (will) potentially dominate the 24-hour news cycle before April" and thus I was too pessimistic on economic activity beginning in the second quarter.

Then again, how bad was that? We just saw that the U.S. economy grew at only a 2.5 percent clip in the second quarter, versus a 5.6 percent pace in the first. Expectations were closer to 3.2 percent. Granted, it could still be revised upward some, but that's a nice slowdown in my book and I can't imagine the third quarter will be any better. As for the warning that hot spots would dominate the news cycle, I wasn't that far off here, either.

So this is what we learned this week aside from the GDP data. The core price deflator that the Federal Reserve likes to follow rose 2.9 percent in the second quarter, far higher than its comfort level of 1-2 percent. Durable goods for June were also up more than expected.

But the Fed's beige book on regional economic activity correctly forecast a slowdown, while both existing and new home sales fell in June with median home prices essentially flat from a year ago, though down in some regions. Just as I forecast last December.

We thus know the consumer is slowing, thanks in no small part to $3 a gallon gasoline, the housing sector has hit a wall, which in turn hurts psychologically in terms of the wealth effect, and hidden in the GDP report was the fact business spending on software and equipment was actually down one percent in the second quarter.

So in the case of our three-legged stool, the consumer, housing and capital spending are all flashing warning signs.

Add it all up, sports fans, and you'll see corporate profits coming in below current expectations for most sectors in the third and fourth quarters. And that's assuming the Middle East quiets down and oil stays around $70 at worst. Frankly, with regards to the last two items that's not a bet I'd take.

But why then, Mr. Editor, did Wall Street rally big? As I noted above the feeling is the Federal Reserve now has enough ammunition to hold the line on rates come its August 8 meeting. Bonds rallied on the news and the stock market's number one concern has been the Fed so it had cause to celebrate as well. Hey, we're all entitled to some premium beer now and then. Enjoy it while you can.

Finally, back to housing, I got a kick out of the new mantra that it's a "buyers' market" out there; as if stagnant or slightly lower prices present a killer opportunity.

Remember, the real estate bubble has been compared to the tech bubble. Do you remember analysts saying Cisco was a screaming buy when it fell from its all-time high of $82 to $70? Do you remember when the Street's shills (oozing grease out of every pore) said Sun Micro, once $65, was a buy at $55? They're now $18 and $4.30, respectively, in case you forgot. So take this buyers' market talk with a grain of salt. I suspect if you can afford to wait another 6-12 months, prices will be even lower. Of course that also means your own place is likely to be as well.

My southern California real estate expert, Josh P., passed along a piece from the San Diego Union-Tribune dated July 21.

" 'I know every time we've gone into a downturn in the home building industry, they've always been longer and deeper than we've all imagined,' D.R. Horton chief executive Donald Tomnitz said. 'So we're preparing for the worst, and we think this one will be longer and deeper than just the last six months.'"

And remember when I reminded those playing the homebuilding sector to watch what the companies are doing with their land portfolios? D.R. Horton is cutting "the number of lots it has under contract in San Diego County and elsewhere earmarked for future development."

"The Fort Worth-based company had put money down on the land because it expected to eventually buy it to build homes. D.R. Horton didn't say exactly how much deposit money it lost in San Diego County."

Nationwide, the company wrote off $57.2 million for the quarter in lost deposits.

And this last note from the Washington Post on the local property scene in Maryland and Virginia.

"The market will take months to shake out, because too many sellers have not accepted that their houses are not worth as much as they had thought," said economist Mark Zandi.

I doubt many of the sellers are rushing out at the same time to buy a lot of big ticket items.

--It was the best week for stocks since the fall of 2004 and spring of 2005, depending on the barometer, with the Dow Jones, S&P 500 and Nasdaq all climbing 3.1 to 3.7 percent. But that just means in the case of the first two that they're back to the levels of June 2, while Nasdaq is still below levels of three weeks ago.

And in keeping with some of the opening market commentary, while there were plenty of companies that reported good earnings, including Merck, Schering Plough, AT&T, Altria, and U.S. Steel, there were others like Amazon, Aetna, and Boeing that didn't.

Then you had issues like UPS and Dupont, which both disappointed. In the case of UPS, they cited a global slowdown, while with Dupont, higher energy and materials costs hurt its bottom line, even as they were able to pass some of these costs on. The point being, you have company specific stories, like Merck or Amazon, that aren't necessarily overall economic barometers, while when a UPS tells you global activity isn't as strong as it used to be, or that future prospects aren't as good, you need to take notice for the bigger picture it presents.

Earlier in the week, stocks did get a boost from more merger and buyout activity, including HCA (more below) and two big tech mergers, AMD and ATI Technology, plus Hewlett-Packard's acquisition of Mercury Interactive.

Bonds rallied on the GDP news and the growing feeling the Fed is finished hiking. Market players are confident that Bernanke meant what he said in his recent congressional testimony; the Fed is willing to stomach higher inflation in the short term in the belief that as the economy slows down, price pressures will abate, too.

--While a NBC / Wall Street Journal survey said 41 percent of Americans approve of Bush's handling of the economy, a full 74 percent are "uneasy" about economic prospects.

--After five years the Doha round of global trade talks collapsed amid a sea of recriminations. Agriculture remains the number one stumbling block as the United States and European Union blame each other. Of course both are big time hypocrites.

The U.S. wants to see more open markets, but for political reasons, primarily, refuses to get rid of its heavy subsidies in key sectors. Europe is acting in the same fashion.

According to Bloomberg News, the EU had offered to trim its farm tariffs by an average of 50 percent, while shielding 8 percent of tariff lines from the highest duty cuts.

The U.S. said the highest tariffs should fall 70 percent, with only 1 percent of products protected from duty cuts, but at the same time it declined to lower the more than $22 billion limit in annual subsidies that it established last year. Currently, farm support in the U.S. is $19 billion a year.

Overall, the World Bank had estimated that savings of $96 billion in lower tariffs would have been achieved had an agreement been reached. In the end, however, all that's left is more protectionist fervor, with the hope for more bilateral and regional type agreements.

--For the first time, Chinese Prime Minister Wen Jiabao admitted the mainland's economy was on the verge of overheating as he called for "forceful measures," including a more flexible currency policy. In a conference call with local officials, Wen cited still soaring fixed asset investment and bank lending in particular.

--General Motors surprised the Street, reporting a profit of $1.2 billion, ex-special charges, as revenues rose 12 percent, far higher than expected. Recovery, however, is far from complete but this was a great first step.

--There is the usual hue and cry over ExxonMobil's latest earnings report, a cool $10.4 billion in profits for the second quarter and the second highest in the history of the world. It's up to the oil companies to show that they are plowing a substantial amount of this back into finding more crude and natural gas.

For its part, Exxon has not been spending as much as you'd think, though it did announce it would increase its capital-and- exploration budget for all of 2006 to $20 billion, a 13 percent increase from last year's level.

Royal Dutch Shell earned $7.3 billion. On the cap-ex front, Shell has doubled its budget on a huge gas-to-liquids project in Qatar to $12 billion. Shell's problem these days has to do with massive cost overruns at some of its sites.

--On the topic of 'energy security,' the Kremlin is rattling the cage yet again. The Caspian Pipeline Consortium, in which Chevron is a major player, has been handed a bill of $253 million for back taxes by federal authorities, shades of Yukos. The oil from this pipeline connects fields in western Kazakhstan to the Black Sea, via Russia, but it's not controlled by Russian national monopoly Transneft.

Russia doesn't want Kazakhstan to be able to increase its oil exports because it not only could one day lead to lower prices (more supply on the market), but there is a limited number of tankers that can then transit through the Bosporus (Istanbul).

--And speaking of the Kremlin and its influence, as I was reading a piece in Business Week on natural gas giant Gazprom, from time to time its important to remember that its chairman, Dmitry Medvedev, is also a first deputy prime minister and, along with Sergei Ivanov, a candidate to replace Vladimir Putin in 2008. There are persistent rumors that if Putin does indeed step down as he keeps insisting he will (he won't), Putin would then become CEO of Gazprom.

And while I've cited these figures before, one can never forget that countries like Finland, Latvia, Lithuania, and Slovakia receive 100% of their natural gas needs from Gazprom. The Czech Republic receives 81% and Austria 73%, to cite a few more that can easily be held hostage.

--HCA, the nation's largest for-profit hospital operator, received a buyout offer of $31 billion, including debt, from the likes of KKR, Bain Capital and Merrill Lynch Global private equity. If it goes through, and a higher bid may yet emerge, it would be the largest leveraged buyout in history. [Sen. Bill Frist's father is the founder of HCA.]

Of course the deal is yet another example of the clout these days of private capital. And as a piece in the Wall Street Journal by Greg Ip and Henny Sender pointed out, the private-equity owners have done a great job at extracting immediate dividends out of the deals. For example:

"Since 2003, companies have borrowed $69 billion primarily to pay dividends to private-equity owners, according to Standard & Poor's Corp. That compares with $10 billion in the previous six years.

"The resurgence of the buyout investors, and their new skill at quickly extracting money long before any turnaround bears fruit, are signs of the ascendance of private money and its broad impact on the world of finance."

It's all just a further example, as well, of the growing power of hedge funds, which are often accounting for half the daily volume at the New York and London stock exchanges.

--UAL Corp. reported its first quarterly profit since 2000, another terrific airline success story. And thanks to rising demand, the airlines were able to raise fares a record 10 percent in the first quarter, thus allowing them to more than cover rising fuel costs.

--Spain has a goal of generating 12 percent of its electricity through wind farms by 2010. [Go carbon fiber!] In the EU, all forms of renewables are supposed to meet 20 percent of energy needs by the same year.

--Aetna is the latest victim of rising medical costs. Its shares tanked 17% on Thursday following release of disappointing earnings thanks to accelerating cost pressures. Ergo, look for your premiums to skyrocket in 2007.

--More on former Brocade Communications Systems' CEO Gregory Reyes, recently charged by the Justice Department with fraud for backdating stock options (for his employees, not necessarily himself).

"Mr. Reyes arrived at Brocade in 1998, hired as chief executive to get the company ready to go public, which it did the next year. A maker of switches involved in the storage of data sent over the Internet, the company became a hot initial public offering.

"It did not hurt that Brocade appeared to be profitable, in contrast to most Internet companies. In fiscal 2000, which ended in October of that year, Brocade reported earnings of $67.9 million.

"But when the company got around to restating its earnings - taking into account the expenses it should have recorded because it did not comply with the rules on stock options - that 'profit' turned into a loss of $951 million, a swing of more than $1 billion. That disclosure was made after Mr. Reyes left.

"During his tenure at Brocade, which lasted six and a half years, the company ended up reporting net losses of $312 million. Mr. Reyes made profits of $556 million on his stock trades, his filings with the Securities and Exchange Commission indicate."

--Good news, potentially, on the bird flu front. GlaxoSmithKline says it has developed a vaccine for the H5N1 strain that may be ready for mass production by 2007.

The key is that the size of the dosage is small, so obviously more people can be covered, but the only question involves the vaccine's efficacy should H5N1 mutate significantly.

--The Chicago City Council passed a bill that would require the "big box" stores, like Wal-Mart and Home Depot, to pay a minimum wage of $10 an hour by 2010, plus benefits. While sponsors considered it a 'great day for the working men and women of Chicago,' Mayor Richard Daley wasn't so sure, observing that the bill could impede growth and tax revenues should the big retailers opt out of the market. This is a landmark case and it doesn't seem as if Daley has the votes to successfully veto it.

--New chief software architect Ray Ozzie of Microsoft (who inherited the title from Bill Gates), admitted in a meeting with analysts that the Internet, not the PC, is the center of the new era, but as company's like Google appear to pass them by, one analyst, Rick Sherlund, summed it up best for Microsoft's suffering shareholders. "They're never as fast as you'd like."

--Lucent previously warned on its second quarter, but this week formally announced sales fell 12 percent. The company continues to blame its revenue problems on delayed spending by telecom carriers that are focused on mergers, as well as Lucent's sales force being focused on survival because of its own merger with Alcatel. So?.if one wants to be optimistic, Lucent says the telecom sector's spending will definitely pick up by the fourth quarter.

Which got me in the car to check out the lawn over at headquarters. [For new readers, just blocks from my home.] Now granted, New Jersey has had an extremely wet summer thus far, but the lawn does indeed look as good as it ever has. Is this a buy signal? Stay tuned. [I haven't looked at the Alcatel / Lucent share split, with the deal still expected to close by year end, but for the archives, Lucent shares finished the week at $2.13.]

--Federal authorities charged three Florida residents with conspiracy and securities fraud in a voicemail scam that first arose in the summer of 2004. This was the one, you'll recall, where a caller identifying herself as "Debbie" left messages on answering machines passing along hot stock tips to her girlfriend after meeting a "hot stock exchange guy," of course pretending not to know she had dialed a wrong number.

Your first tip-off if you had received one of these, though, is that there is no such thing as a "hot stock exchange guy." Sleazy, yes. Hot, no.

But you have to hand it to these three. The combined market value of the six small-cap companies they were discussing rose $179 million in just 26 days. If convicted on all charges, however, each would face a maximum prison term of 45 years.

--Authorities in China launched an investigation into product quality and in the first half of this year found that over 20 percent failed national standards, i.e., were shoddy or counterfeit.

--My portfolio: No changes, with my major play still being the carbon fiber stock. It's been suffering and I'm worried about the earnings report. Overall, unless the market totally collapses, thus presenting a possible buying opportunity on at least a short-term basis, I doubt I'll change my 80% cash / 20% equity recommendation for the balance of the year.

Iraq: Prime Minister Nouri al-Maliki came to Washington for consultations with President Bush and my immediate reaction to their joint press conference was I had never seen Bush look so grim. Other descriptions from reporters and pundits included "uncharacteristically gloomy," "unusually dour," and "I've never seen him so pessimistic," the last one being from Howard Feinman of Newsweek.

Prime Minister Maliki's security plan has been a shambles as the militias and death squads continue to control Baghdad. And what an embarrassment for President Bush to have to concede, now, that there aren't enough troops in the Iraqi capital. I'll spare you points of reference from yours truly that predicted this years ago, let alone recently. The "brilliant" Gen. George Casey should be dismissed of his duties.

Then again, just how much longer will the United States really be in Iraq? On one hand it's now clear there will not be significant troop withdrawals before November's mid-term elections, as desperately hoped for by the administration as well as all Republican candidates. It seems highly unlikely that conditions on the ground will improve enough by then for the White House to be able to claim any great progress. I'm just not so sure we don't begin pulling out far faster than anticipated beginning next spring.

In fact, the Washington Post's David Ignatius reported that the key figure in Iraq, moderate Ayatollah Sistani, has sent word to Bush, through his network, that he himself has given up.

Certainly the polls in the U.S. reflect this opinion, with only 34 percent approving of Bush's handling of Iraq, while just 32 percent see a successful conclusion. [NBC News / Wall Street Journal]

And it doesn't help when Maliki blasts Israel and refuses to condemn his fellow Shiites, Hizbullah.

"The Iraqi government of Prime Minister Nouri al-Maliki was commonly described as the country's last chance to avoid civil war when it took office two months ago?.Mr. Maliki appears close to failing that fateful test."

As David Ignatius reports, though, there perhaps is one last chance to begin to secure Baghdad and that is the policy of targeting death squad leaders, ten of whom have been "taken out," primarily by U.S. and British special forces. Moqtada al- Sadr threatens to bring his militia out en masse, but perhaps this is what the U.S., Britain and the Iraqi government really want. As one administration official puts it: "If confrontation comes, it's best that it come now."

Lastly, we still have this ongoing issue of Kurdish fighters using Kurdistan as a refuge for hit and run attacks across the border against the Turks. Turkish Prime Minister Recep Erdogan has called for NATO to join the combat, just as it is doing in Afghanistan.

Iran: Our good friends the Russians continued to block any UN Security Council resolution that would lead to Iran having to suspend its uranium enrichment operation, though on Friday the Security Council did approve a watered down version requiring Iran to quit the program by end of August. However, before you get too excited, the resolution apparently has no teeth.

--Russia: Speaking of Vladimir Putin and Co., he hosted Venezuelan President Hugo Chavez as the Che Guevara wannabe wrapped up a $1 billion arms agreement with Russia for 30 helicopter, 30 fighter jets, and a new plant in Venezuela to build Kalashnikov rifles; this last bit on top of 100,000 Kalashnikovs that Chavez previously purchased. In the case of Iran and Venezuela, Putin is blatantly ignoring U.S. criticism.

As for Chavez, who this week also visited the dictatorship in Belarus, he told the Russian people in a televised appearance.

"The United States is the most immoral and cynical empire, worse even than the Roman empire?.If somebody is going to meddle with us we'll fight back, like you did in Stalingrad."

Separately, four members of the Commonwealth of Independent States, including Georgia and Ukraine, blew off a meeting of leaders in Moscow. Georgia is ticked about Russia's military presence in the breakaway republics of Abkhazia and South Ossetia, while Ukrainian President Victor Yushchenko said he was too busy at home given Kiev's political crisis.

But if you are traveling to Moscow, the eight leaders who did show dined at the "exclusive riverfront Prichal restaurant outside of Moscow, where they dined on meat and fish kebabs, grilled starlet and carp, marinated mushrooms and a whole calf roast on a spit." [Moscow Times]

What the heck is starlet? Bet it's their version of mahi-mahi, this being the label attached to any strange fish delivered to U.S. restaurants. "What should we call it?" "What do you think? Mahi-mahi!"

Back to Georgia, it sent a force into the rebel held Kodori Gorge near Abkhazia, which had the potential to put them in conflict with Russian "peacekeepers" there. Supposedly the mission was successful in regaining control. Remember, the U.S. is training Georgia's military.

North Korea: Pyongyang refuses to rejoin the six-party talks on its nuclear program unless the U.S. lifts its financial sanctions. Interestingly, it just came to light this week that China back in September had followed Washington's lead in freezing North Korean bank accounts, a mild positive.

Overall, China is still mostly concerned that should Kim Jong- il's regime collapse, China would be left with a huge refugee problem, a fear Kim has thus far been successful in exploiting which is why the bank move was interesting.

India: The U.S. House approved the nuclear cooperation agreement between Washington and New Delhi, 359-68, with few changes in the original document signed by the two nations. Indian Prime Minister Manmohan Singh had warned "(India) will never compromise in a manner which is not consistent with the (statement signed last year)."

California Democratic Congressman Tom Lantos said, "History will regard what we do today as a tidal shift in relations between India and the United States. This will be known as the day when Congress signaled definitively the end of the Cold War paradigm governing interactions between New Delhi and Washington."

I agree, especially in light of recent developments that have India holding extensive talks with China and Iran. Energy needs are one thing, but we can't let India drift into their orbit.

Opponents of the nuke agreement, though, argue it pours fuel on the fire in terms of a regional arms race. To wit?.

Pakistan: The Washington Post reported that Pakistan is building a new plutonium reactor capable of producing fuel for 40-50 bombs a year; plutonium being easier than uranium to mount on warheads. Of course this sparks fears of a South Asian arms race, though in this instance, because Pakistan is doing little to hide the building of the plant, at least we have a better understanding of how far along they are and the experts are saying 2010 before production could begin. So Washington will formally address it on, oh, about Dec. 27, 2009.

[As an aside on the nuclear front, this week Libya's Mummar Gaddafi was quoted as admitting his nation was "close to building a nuclear bomb," the first such formal admission since Libya agreed to dismantle its program.]

The Balkans: You can't ignore this region. While a flare-up might not roil international markets, these days what it would do is potentially sap NATO of military resources that are needed elsewhere such as in Afghanistan and possibly the Middle East.

And so I'll keep my eye on Kosovo independence talks that commenced this week, the first between itself and Serbia since Yugoslav Serb forces were driven out of Kosovo in 1999. Serbia is adamant that Kosovo remain part of it. [I'm heading to the Balkans mid-September?Bulgaria and Romania.]

Democratic Republic of Congo: Despite some recent, relatively small-scale violence, it is truly historic what is happening this weekend, the first democratic election in the country's history.

This is hard to believe, but outside of its cities Congo has just 200 miles of paved roads, in a nation about 1 ? times the size of Texas. So this creates some logistical issues, as you might imagine. Paper ballots for 25 million will be delivered by "plane, boat, dug-out canoe, bicycle, mule and foot."

The ballot itself is the size of a poster, with 33 presidential candidates plus those up for parliament. Of course the vast majority of the people will have never seen or heard of those running.

Zimbabwe: President Robert Mugabe is still around, unfortunately. His government just announced it will eavesdrop on every aspect of private life, including mail, e-mail and phone calls without any court approval.

The joke of it is, Mugabe claims it's all part of the international war on terror. Right. Al-Qaeda is targeting Harare.

Australia: I've known the years-long drought here has been severe, but didn't realize just how bleak the future is until I read that some believe Perth will run out of water within ten years unless a desalination plant is urgently constructed.

Dow Jones +3.2% [11219]
S&P 500 +3.1% [1278]
S&P MidCap +4.0%
Russell 2000 +4.2%
Nasdaq +3.7% [2094]

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