Educate Yourself

Week in Review
For the week 8/7/2006 - 8/11/2006
Brian Trumbore
President/Editor, StocksandNews.com

Former U.S. ambassador to the UN, Richard Holbrooke / Washington Post, Aug. 10, 2006

"Two full-blown crises, in Lebanon and Iraq, are merging into a single emergency. A chain reaction could spread quickly almost anywhere between Cairo and Bombay. Turkey is talking openly of invading northern Iraq to deal with Kurdish terrorists based there. Syria could easily get pulled into the war in southern Lebanon. Egypt and Saudi Arabia are under pressure from jihadists to support Hizbullah, even though the governments in Cairo and Riyadh hate that organization. Afghanistan accuses Pakistan of giving shelter to al-Qaeda and the Taliban; there is constant fighting on both sides of that border. NATO's own war in Afghanistan is not going well. India talks of taking punitive action against Pakistan for allegedly being behind the Bombay bombings. Uzbekistan is a repressive dictatorship with a growing Islamist resistance?.

"This combination of combustible elements poses the greatest threat to global stability since the 1962 Cuban missile crisis, history's only nuclear superpower confrontation. The Cuba crisis, although immensely dangerous, was comparatively simple: it came down to two leaders and no war. In 13 days of brilliant diplomacy, John F. Kennedy induced Nikita Khrushchev to remove Soviet missiles from Cuba.

"Kennedy was deeply influenced by Barbara Tuchman's classic, 'The Guns of August,' which recounted how a seemingly isolated event 92 summers ago - an assassination in Sarajevo by a Serb terrorist - set off a chain reaction that led in just a few weeks to World War I. There are vast differences between that August and this one. But Tuchman ended her book with a sentence that resonates in this summer of crisis: 'The nations were caught in a trap, a trap made during the first thirty days out of battles that failed to be decisive, a trap from which there was, and has been, no exit.'

"Preventing just such a trap must be the highest priority of American policy. Unfortunately, there is little public sign that the president and his top advisers recognize how close we are to a chain reaction, or that they have any larger strategy beyond tactical actions?.

"The same is true of talks with Iran?Why has the world's leading nation stood aside for over five years and allowed the international dialogue with Tehran to be conducted by Europeans, the Chinese and the United Nations? And why has that dialogue been restricted to the nuclear issue - vitally important, to be sure, but not as urgent at this moment as Iran's sponsorship and arming of Hizbullah and its support of actions against U.S. forces in Iraq?

"Containing the violence must be Washington's first priority. Finding a stable and secure solution that protects Israel must follow. Then must come the unwinding of America's disastrous entanglement in Iraq in a manner that is not a complete humiliation and does not lead to even greater turmoil. All of this will take sustained high-level diplomacy - precisely what the American administration has avoided in the Middle East. Washington has, or at least used to have, leverage over the more moderate Arab states; it should use it again, in the closest consultation with and on behalf of Israel.

"And we must be ready for unexpected problems that will test us; they could come in Turkey, Pakistan, Egypt, Syria, Jordan or even Somalia - but one thing seems sure: They will come. Without a new, comprehensive strategy based on our most urgent national security needs - as opposed to a muddled version of Wilsonianism - this crisis is almost certain to worsen and spread."

"Yesterday on this page, in a serious and thoughtful survey of a world in crisis, Richard Holbrooke listed 13 countries that could be involved in violence in the near future: Lebanon, Israel, Iraq, Iran, Syria, Turkey, Egypt, Saudi Arabia, Afghanistan, Pakistan, India, Uzbekistan, Somalia. And in addition, of course, the United States.

"With those 14 nations Holbrooke could make the case for what I describe as 'an emerging third world war' - a long-running conflict whose latest manifestation was brought home to Americans yesterday with the disclosure in London of yet another ghastly terrorist plot - this one intended to destroy a number of airliners en route to America.

"But while Holbrooke lists the geography accurately, he then asserts an analysis and a goal that do not fit the current threats.

"First, he asserts that the Iranian nuclear threat is far less dangerous than violence in southern Lebanon?.

"In fact an Iran armed with nuclear weapons is a mortal threat to American, Israeli and European cities. If a nonnuclear Iran is prepared to finance, arm and train Hizbullah, sustain a war against Israel from southern Lebanon and, in Holbrooke's own words, 'support actions against U.S. forces in Iraq,' then what would a nuclear Iran be likely to do? Remember, Iranian officials were present at North Korea's missile launches on our Fourth of July, and it is noteworthy that Venezuela's anti- American dictator, Hugo Chavez, has visited Iran five times.

"It is because the Bush administration has failed to win this argument over the direct threat of Iranian and North Korean nuclear and biological weapons that Americans are divided and uncertain about our national security interests?.

"Yet Holbrooke indicates that he would take the wrong path on American national security. He asserts that 'containing the violence must be Washington's first priority.'

"As a goal this is precisely wrong. Defeating the terrorists and thwarting efforts by Iran and North Korea to gain nuclear and biological weapons must be the first goal of American policy. To paraphrase Abraham Lincoln, if violence is necessary to defeat the terrorists, the Iranians and the North Koreans, then it is regrettably necessary?.

"Our enemies are quite public and repetitive in saying what they want. Not since Adolf Hitler has any group been as bloodthirsty and as open. If Holbrooke really wants a 'stable and secure' Israel he will not find it by trying to appease Iran, Syria, Hizbullah and Hamas?.

"The democracies have been talking while the dictators and the terrorists gain strength and move closer to having the weapons necessary for a terrifying assault on America and its allies. The arrests yesterday of British citizens allegedly plotting to blow up American airliners over the Atlantic Ocean are only the latest example of the determination of our enemies. This makes the dialogue on our national security even more important."

"It's too early to say with any confidence yet, but it looks as though yesterday's plot to blow up U.S.-bound aircraft from the UK was closer to the 9/11 tragedy than the Miami-Chicago farce. If the police and intelligence authorities have succeeded in foiling such a murderous plan, the correct response is one of immense gratitude to them, pride in our security institutions and continued vigilance against future plots.

"But we should also remember that our continuing existence lies not just in inconvenient security measures and uncomfortably intrusive intelligence activities, but in a grand global strategy. Success requires, in addition to the tiresome banalities of long check-in queues and tighter limits on hand luggage, a commitment, whatever the costs, to eradicate the deep global causes that threaten us.

"And for this it just won't do to claim it's all about bad U.S. foreign policy. It is repetitive but necessary to point out that we didn't start this war when we invaded Iraq. The attacks on 9/11 were planned not only before we invaded, but during a time when the U.S. was expending extraordinary effort to try to forge a lasting settlement between Israel and the Palestinians.

"And if our actions have radicalized the jihadists we should remember that they are animated at least as much by our ridding Afghanistan of their spiritual brethren, the Taliban, as they are by whatever crimes the U.S. may have committed in Baghdad.

"The same applies to Israel and Lebanon. Not only is the current war the direct result of Hizbullah's aggression, its deeper causes lie in the continued determination by Israel's enemies, increasingly emboldened by Tehran, to liquidate the Jewish state.

"Few can look at events in Iraq or Lebanon today with optimism, but it would be dangerous folly to assume, as some do, that the West should retreat, beating its breast and promising never to offend again?.

"I will grant you that the Iraq war has been characterized, in conception and execution, by blunder after blunder. And it is certainly possible that, in their failures there, the U.S. and Britain have made the world more unstable, not less. But we should not, in our frustration, confuse the real enemies here. We should not mistake the unlooked-for dangers caused by blunders and arrogance in Washington for the targeted threats posed by nihilism and hatred in much of the Middle East, and in some of our own cities.

"Yesterday provided us with yet another glimpse of the awful reality of our long war and associated miseries. We must be very careful not to ascribe their creation to our own errors."

Yes, it would appear we dodged the "Big One" with the foiling of the terror plot. It should also be viewed as a victory in the war.

But on Bill O'Reilly's show Thursday night, Newt Gingrich echoed my own sentiments exactly. "We're not spending enough money domestically and we need a wartime budget." Gingrich then added, "Five years after 9/11 and we have no evidence we're winning this war."

I could show you what I wrote in the days after 9/11 and it was all about doing whatever it takes, sacrificing, anything to protect the homeland and defeat the terrorists.

I agree with the Bush administration's policies on surveillance and the Patriot Act, but in other realms, such as in securing the ports and borders, the execution has been dangerously lacking.

And anyone believing we're succeeding in Iraq has to have been in a coma for the past three years, while in Iran, as I wrote in 2002, we had an opportunity to support an incipient student movement then that had a chance of becoming something far greater and the White House did nothing.

When it comes to Lebanon, the United States, alone, as the world's superpower, failed to heed the warnings and pleas for help from the Lebanese government, yet Secretary of State Condoleezza Rice has the temerity to say the U.S. is "seizing opportunities" and that we seek a "different kind of Middle East." Tell me where I'm wrong in trying to comprehend how a Lebanon, with its infrastructure virtually wiped out, is a positive for the region when the United States, and to a lesser extent the UN and some of our 'allies,' didn't even try to prevent a train wreck that I wrote of for the past 1 ? years since the assassination of Rafik Hariri. Or maybe I don't get it.

[The UN Security Council unanimously approved a resolution to end the fighting, with the withdrawal of Israeli troops to be accompanied by a combined UN and Lebanese force of up to 30,000 in the south. Hizbullah is to free captured Israeli soldiers without condition. Israel's cabinet votes on it Sunday, though if they approve as expected full implementation could nonetheless take weeks, if not months. As I go to post I do not know Hizbullah's reaction to the UN Security Council move.]

"So long as Hasan Nasrallah is alive and has an organization to lead, his survival will make him a hero in the Arab world, and his path - that of seeking Israel's destruction - will be seen to have been vindicated. This may be a bizarre way to look at things, through Western eyes, but perceptions and beliefs can create their own reality.

"The sight of Israel being pounded daily by hundreds of rockets can be counted to hearten the jihadis, not those seeking a more moderate path for the Muslim world. By this logic, if a militia like Hizbullah can bloody Israel and survive, then the jihadis can claim that Israel is not invincible, and destroying Israel is a realistic goal.

"In addition, as much as the government understandably does not want the war to expand to Syria, Israel cannot ignore the fact that Syria is busy resupplying Hizbullah, and that some of these supplies are getting through. It is not enough for Israel to attempt to destroy these supplies when they cross into Lebanon, with only partial effect. The government should state that it regards the resupplying of Hizbullah to be an act of war, and warn that it will take action to prevent the resupply if it continues.

"Victory needs to be defined as it originally was when this conflict began more than three weeks ago - by Hizbullah's destruction as a military force. The Bush administration should need little persuasion that if Hizbullah becomes more powerful within Lebanon, it will be a victory for Iran and a defeat for the U.S?.

"Time and again, Israel has wanted to believe that how its actions are perceived in the Arab world does not matter. Yet the terrorists and the countries that back them do not necessarily operate on the basis of Western notions of national interest. Creating a perception of weakness and defeat can have real consequences. The common objective of addressing the underlying causes of the next war begins by ending this war with Hizbullah's indisputable defeat."

"Some accuse Israel of a 'disproportionate' response. But what exactly is a 'proportionate' response when a whole people and their society are threatened with extinction when hostilities are initiated without provocation, when every act of restraint invites a vicious contempt? Israeli Prime Minister Ehud Olmert's government is one of the most pacific since the state was created. It is without a single general in the cabinet. It has made a commitment to withdraw from approximately 90% of the West Bank. How should it defend its citizens? ?.

"Hizbullah must not come out of this with even a perceived victory. Otherwise, the Muslim Brotherhoods in Egypt and Jordan, as well as other jihadists, will look to Iran for leadership and to Hizbullah for operational assistance. Over time this will pose an existential question for Israel and create still more havoc for the Middle East. If Israel is seen as victorious, Palestinian extremists will be weakened and Syria, and possibly Iran, might be forced to reappraise their approach. Rarely have the stakes been higher."

"For the second time in the long history of the Middle East conflict, an enemy of Israel has effectively said: We do not care what you do.

"Hizbullah - in choosing not to return the two soldiers it seized on July 12, and in its bombardment of Israel - has declared that it does not care if its war-making leads Israel to attack Lebanon's cities, ruin that country's economy and kill its people. What matters most is inflicting damage on Israel, weakening its morale and goading it to a level of destruction that will incite the world's wrath. The Palestinians said as much with their second intifada and their suicide bombings. But this is different because Hizbullah's daily rainfall of rockets in Israel portends an intolerable military assault without end?.

"The political Islamists are emboldened by their newfound power. As Nasrallah has boasted, 'When were two million Israelis forced to become displaced, or to stay in bomb shelters for more than 18 days?' And the danger will escalate a thousandfold if Iran, the epicenter of political Islam and Hizbullah's master, achieves its own invulnerability with nuclear weapons, so that it too can launch rocket and other attacks against its many targets. Iran's former president and current power broker, Hashemi Rafsanjani, spoke candidly in 2001: 'The use of even one nuclear bomb inside Israel will destroy everything,' he said, although it would harm the Islamic world. 'It is not irrational,' he went on, 'to contemplate such an eventuality.'

"A nuclear Iran, sharing Hizbullah's and Hamas' enmity for Israel's very existence, is a foe with a million times the wealth and destructive might to found, fund and supply many more Hizbullahs against many more enemies, including the hated West.

"Israel's political Islamic enemies are studying and rejoicing over the new geostrategic situation. These totalitarians' ultimate targets - all 'infidels,' especially here and in Europe - should study it as well, be sobered and realize that Israel, in fighting this war in its self-defense, to reestablish a geostrategic balance, and for its long-term survival, is ultimately fighting for them as well."

"We must not forget that Hizbullah's armed resistance was spawned by Israel's invasion and occupation of Lebanon in 1982. During 18 years of Israeli occupation, Hizbullah grew under the very noses of its occupiers into a formidable force that now poses a serious challenge to its oppressors. Any UN resolution that fails to demand the withdrawal of Israel's 10,000 troops from South Lebanon will invite further armed resistance. Sanctioning Israel's occupation of South Lebanon also ensures that thousands of refugees, whose humanitarian plight ought to be an utmost concern in any UN resolution, will not be able to return to their homes in the South.

"Furthermore, instead of calling for a ceasefire, the resolution calls upon Hizbullah to cease all of its attacks, while implicitly giving Israel the right to continue its 'defensive' operations. Where does that leave Lebanese civilians? Israel has argued that all of its military activities in Lebanon since July 12, including the killing of over 900 civilians, have been justified in the name of self-defense. Are the Lebanese now expected to freely allow themselves to be slaughtered in the hundreds by an occupying army?"

"Israel has repeatedly used its military power in the past 40 years to stop attacks against it from South Lebanon, always to no avail. Hizbullah's impressive performance to keep fighting and attacking during the past month suggests that a historic turning point has been reached. In a narrow but ferocious engagement, an Arab force has fought Israel's military to a draw, and thus perhaps neutralized Israel's historical reliance on its military deterrence to impose its will on its neighbors. This may be why Israel is attacking civilian installations throughout Lebanon, making a wasteland of the country - as a lesson to anyone else who might consider challenging it militarily. This strategy probably will not work either, because savagery, like occupation, only begets resistance and defiance.

"Hizbullah will emerge stronger politically from the ceasefire diplomacy if Israel is forced to comply with the key Lebanese demands of exchanging prisoners, leaving the Shebaa Farms, and stopping cross-border flights and attacks, in return for no more attacks against Israel from Lebanon. If Israel is no longer a threat to Lebanon, Hizbullah would not need to remain an armed resistance movement beyond the control of the government.

"Israel and the U.S. now focus their energy on preventing Hizbullah from emerging from this war politically strengthened - because a stronger Hizbullah with widespread support in the Arab world and Iran would make the Israeli-American position in the other four wars immeasurably more difficult. Hizbullah in Lebanon is the embodiment of all five wars, which is why it must be defeated forever in Israeli and American eyes, as well as in the eyes of those many Lebanese and other Arabs who mistrust Hizbullah and who fear its local and regional aims."

"A military solution to Israel's savage war on Lebanon and the Lebanese people is both morally unacceptable and totally unrealistic. We in Lebanon call upon the international community and citizens everywhere to support my country's sovereignty and end this folly now. We also insist that Israel be made to respect international humanitarian law, including the provisions of the Geneva Conventions, which it has repeatedly and willfully violated.

"As the world watches, Israel has besieged and ravaged our country, created a humanitarian and environmental disaster, and shattered our infrastructure and economy, putting an intolerable strain on our social and economic systems. Fuel, food and medical equipment are in short supply; homes, factories and warehouses have been destroyed; roads severed, bridges smashed and airports disabled.

"The damage to infrastructure alone is running into the billions of dollars, as are the losses to owners of private property, and the long-term direct and indirect costs due to lost revenue in tourism, agriculture and industrial sectors are expected to be many more billions. Lebanon's well-known achievements in 15 years of postwar development have been wiped out in a matter of days by Israel's deadly military might.

"For all this carnage and death, and on behalf of all Lebanese, we demand an international inquiry into Israel's criminal actions in Lebanon and insist that Israel pay compensation for its wanton destruction.

"Israel seems to think that its attacks will sow discord among the Lebanese. This will never happen. Israel should know that the Lebanese people will remain steadfast and united in the face of this latest Israeli aggression - its seventh invasion - just as they were during nearly two decades of brutal occupation. The people's will to resist grows ever stronger with each village demolished and each massacre committed."

"If former Prime Minister Ariel Sharon were dead he would be turning in his grave. In the few short months since his incapacitation, the new strategic concept that he championed for the Gaza Strip, like its model on Israel's northern frontier with Lebanon, has been all but destroyed by an Israeli military establishment that was never reconciled to it and by a newly installed civilian leadership that chose not to confront the generals.

"Putting Humpty-Dumpty back together again is still possible on Israel's front, where the betrayal of Sharon's plan, for all the destruction wreaked on Gaza, can be remedied. But Israel's ill- conceived adventure in Lebanon represents sweet revenge for militants in Israel who continue to be seduced by the idea of a Lebanese protectorate first outlined in the abortive May 17, 1983, peace agreement between Israel and Lebanon, a fantastic idea that can only be realized, if at all, in the aftermath of a terrible regional war that threatens to unfold.

"Say what you want about Sharon, it is near certain that he would never have been bamboozled into the war that the generals, cheered on by Washington, sold his successor Ehud Olmert in the few short hours after Hizbullah forces attacked Israel and captured two soldiers. As the architect of Israel's 1982 invasion of Lebanon, Sharon saw his grand vision of domination over its northern neighbor, the destruction of the Palestine Liberation Organization, and a massive transfer of Palestinian refugees to Jordan collapse into an Israeli commission of inquiry that forced him from the Defense Ministry.

"Sharon went into what was to be a short-lived political exile, but Israel's occupation of the southern rump of Lebanon continued for 18 long and bloody years. Prime Minister Ehud Barak's 1999 campaign for the premiership was going nowhere until he promised to withdraw Israeli forces from the country. The Israeli public, though not the generals, was sick of sending sons to a foreign land that reliably hemorrhaged Israeli casualties. Israel's retreat across the border in May 2000 was viewed at the time as the end of a sad chapter in Israel's history, never to be repeated."

"Consider the choice now before Mr. Nasrallah. As a matter of propaganda, he might prefer to keep the war going. He has been riding a wave of Muslim support that shows no signs of cresting. Even in Egypt, the cleric is compared to Gamal Abdel Nasser, the difference being that while Nasser was thrashed by Israel in less than a week, Mr. Nasrallah remains unbeaten and unbowed after nearly a month. For now, he is the symbolic leader of the Muslim world, bridging the gap between Sunnis and Shiites, secular nationalists and Muslim fundamentalists - a latter-day Yasser Arafat in the garb of an ayatollah.

"As a matter of strategy, however, Mr. Nasrallah would do well to exercise restraint. Politically, his stock can go no higher; if the war really ends tomorrow, he will emerge not only as the clear victor against Israel but as the de facto master of Lebanon. The international community will be required to consult, court and ultimately legitimize him as the details of this resolution - as well as a subsequent one spelling out the remit of an international force for southern Lebanon - are put into place. That could take weeks or months. In the meantime, Israel would lose the military and political initiative, demobilize its reserves and begin to withdraw its forces. The Lebanese government of Fouad Siniora, formerly an ally of the U.S. and an opponent of Syria - would also be brought to heel, as it would be entirely dependent on Mr. Nasrallah's say-so to implement a resolution to which it is ostensibly a party."

"With every war there are two days to keep in mind when the guns fall silent: the morning after, and the morning after the morning after. America, Israel and all those who want to see Lebanon's democracy revived need to keep their eyes focused on the morning after the morning after.

"The only way that the fighting in south Lebanon will be brought to a close is if all the parties accept a ceasefire and the imposition of a robust international peacekeeping force, led by France, along the Israeli-Lebanon border - supplanting Hizbullah.

"The morning after that ceasefire goes into effect, everyone knows what will happen: Hizbullah's leader, Hasan Nasrallah - no matter how battered his forces and how much damage his reckless war has visited on Lebanon - will crawl out of his bunker and declare a 'great victory.' Hizbullah, he will say, fought the Israeli Army to a standstill inside Lebanon and rained rockets on northern Israel. Meanwhile, military analysts everywhere will write that Israel has 'lost its deterrence' vis-?-vis Arab forces, and blah, blah, blah?.

"On the morning after the morning after, Lebanese war refugees, who had real jobs and homes, will start streaming back by the hundreds of thousands, many of them Shiites. Tragically, they will find their homes or businesses badly damaged or obliterated. Yes, they will curse Israel. But they and other Arabs will also start asking Nasrallah publicly what many are already asking privately:

" 'What was this war all about? What did we get from this and at what price? Israel has some roofs to repair and some dead to bury. But its economy and state are fully intact, and it will recover quickly. We Lebanese have been set back by a decade. ?For what? For a one-week boost in 'Arab honor?' So that Iran could distract the world's attention from its nuclear program? You did all this to us for another country? ?.

"Israel needs to keep its eyes on the prize. It's already inflicted enormous damage on Hizbullah and its community, but Nasrallah will only have to pay the full price for inviting all that destruction once the guns fall silent on the morning after the morning after. So let's get there as soon as possible. That will deter him. What would deter him even more, though, would be if the UN would go ahead and impose sanctions on Iran for its illicit nuclear bomb program. After all, it was Iran, Nasrallah's master, that ordered up this war to distract the UN from doing just that. It would be nice to say to Iran: You ravaged Hizbullah for nothing."

"In the air, the Israeli Defense Force has flown over 10,000 sorties, dropping more than 13,000 bombs and launching over 2,000 air-to-ground missiles. Yet the terrorists keep firing 'junk' rockets - they're shadow targets airpower can't hunt.

"Embodying a brave military's strategic blindness, a retired major general remarked dismissively that 'a missile strike on Tel Aviv wouldn't matter, because it wouldn't do any serious damage.'

"That's nuts. If one Hizbullah missile reached Tel Aviv and knocked over a trash can, it would be perceived as an electrifying triumph by the Muslim masses in the Middle East.

"The problem isn't that the Israeli generals are 'fighting the last war.' The problem is that they haven't been fighting seriously - as if Israel's future depends on it. The stakes are huge, and they've been fighting small. Now they'll have to hit very hard to make up for lost time.

"A lone general put the situation bluntly: 'Hizbullah prepared for exactly the war we're fighting.' ?

"Facts hardly matter in the Middle East (for Arabs, especially, facts are too terrible to contemplate). Beliefs trump all else. And tens of millions of Arabs and Persians already believe that Hizbullah's the victor.

"In Islam, as in Judaism and Christianity, there are certain beliefs concerning the cosmic struggle at the end of time - Gog and magog, anti-Christ, Armageddon, and for Shiite Muslims, the long awaited return of the Hidden Imam, ending in the final victory of the forces of good over evil, however these may be defined. Mr. Ahmadinejad and his followers clearly believe that this time is now, and that the terminal struggle has already begun and is indeed well advanced. It may even have a date, indicated by several references by the Iranian president to giving his final answer to the U.S. about nuclear development by Aug. 22. This was at first reported as 'by the end of August,' but Mr. Ahmadinjad's statement was more precise.

"What is the significance of Aug. 22? This year, Aug. 22 corresponds, in the Islamic calendar, to the 27th day of the month of Rajab of the year 1427. This, by tradition, is the night when many Muslims commemorate the night flight of the prophet Muhammad on the winged horse Buraq, first to 'the farthest Mosque,' usually identified with Jerusalem, and then to heaven and back (c.f., Koran XVII.1). This might well be deemed an appropriate date for the apocalyptic ending of Israel and if necessary of the world. It is far from certain that Mr. Ahmadinejad plans any such cataclysmic events precisely for Aug. 22. But it would be wise to bear the possibility in mind.

"A passage from the Ayatollah Khomeini, quoted in an 11th- grade Iranian schoolbook, is revealing. 'I am decisively announcing to the whole world that if the world-devourers [i.e., the infidel powers] wish to stand against our religion, we will stand against their whole world and will not cease until the annihilation of all them. Either we all become free, or we will go to the greater freedom which is martyrdom. Either we shake one another's hands in joy at the victory of Islam in the world, or all of us will turn to eternal life and martyrdom. In both cases, victory and success are ours.'

"In this context, mutual assured destruction, the deterrent that worked so well during the Cold War, would have no meaning. At the end of time, there will be general destruction anyway. What will matter will be the final destination of the dead - hell for the infidels, and heaven for the believers. For people with this mindset, MAD is not a constraint; it is an inducement.

"How then can one confront such an enemy, with such a view of life and death? Some immediate precautions are obviously possible and necessary. In the long term, it would seem that the best, perhaps the only hope is to appeal to those Muslims, Iranians, Arabs and others who do not share these apocalyptic perceptions and aspirations, and feel as much threatened, indeed even more threatened, than we are. There must be many such, probably even a majority in the lands of Islam. Now is the time for them to save their countries, their societies and their religion from the madness of MAD."

The markets held up well under the renewed terror threat but on the week both equities and bonds still declined for one reason; the feeling that the Federal Reserve, despite 'pausing' for the first time since June 30, 2004, may have to resume raising interest rates in the near future.

In announcing its move on Tuesday to hold the line, but with a rare dissenter on the board, the Fed's statement reiterated Chairman Ben Bernanke's consistent message of the past two months, namely that the economy was cooling, thanks to the housing slowdown and high energy prices, as well as because of the lag effect of the past 17 rate hikes.

But inflation, it avers, despite running hotter than what the Fed is normally comfortable with, will decline as the pace of economic activity slows. However, the Fed will keep focusing on the data and it is this fact that led to the week's poor performance.

Friday's retail sales report for July was stronger than expected, up 1.4%, which in and of itself would give the Fed pause that perhaps it put on the brakes too soon, but more importantly the import price index component was definitively above any Fed target, up 0.9%.

Ergo, by week's end traders were screeching to a halt in their best Roadrunner interpretation. 'Perhaps we should just wait a while before committing any new capital,' they mused.

Let's face it, for the Federal Reserve to have to raise interest rates all over again come September would be a major bummer. But since it's not likely the Fed wants to admit a mistake, it will probably wait until October to do so, if need be, and imagine if the inflation data in between kept flashing warning signs. So that's the new conundrum.

Meanwhile, housing is tanking. Don't take it from me - though you could have the past year or so and appeared 'in the know' at your cocktail parties, even if not particularly popular - but rather listen to those whose business depends on correctly forecasting trends.

Like Angelo Mozilo, CEO of the largest home mortgage lender Countrywide Financial. "I've never seen a soft landing in 53 years." Or ISI economist Nancy Lazar, who on CNBC said "housing is weakening very significantly." Or Robert Toll, chairman and CEO of luxury home builder Toll Brothers, who said the current slowdown "is the first downturn in the 40 years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors. Instead, it seems to be the result of an oversupply of inventory and a decline of confidence." Signed contracts for Toll are down a whopping 45% from a year ago.

Economist Mark Zandi pretty well summed it up. "We could be underestimating the dark side. Euphoria could turn into abject pessimism very quickly."

So the question becomes, just how much will a slowdown in the housing sector, which has been the engine of growth for years, impact consumer spending? A lot. And that's not taking into consideration the millions in the construction, home improvement and home-lending industries, for starters, that could lose their jobs.

It was all so predictable, even if some of us were early in sounding the alarm. The easiest warning sign, looking back, was housing affordability. Bloomberg News ran a typical story this week in examining Naples, Florida. Admittedly, Naples is bubble central as home prices rose a stupendous 140% since 2001.

But now Naples is losing "teachers, nurses, paralegals and other middle-income workers" who are pursuing jobs elsewhere because they'd have to take out sixteen home equity loans on top of their mortgage to be able to afford to live in this lovely community.

And, again, this is a global phenomenon. It could be crash city, sports fans, though by definition this is 2007's headline, not this year's.

One last item on the topic, and far closer to home, concerns a story in the New York Times on the New York / New Jersey region.

From 2000-2004, however, property taxes have gone up two to three times the level of income.

--The major averages all lost at least 1% on the week, with the Dow Jones falling back to 11088, off 1.4%, and Nasdaq declining 1.3% to 2057. Nasdaq has now declined 8 of the last ten weeks. Even a bullish earnings report, and forecast, from Cisco Systems couldn't help the tech barometer.

Rates rose across the board on signs the economy may not be cooling off as fast as the Fed expects it to, though there was more good news on the budget deficit front as it narrowed $20 billion for the month of July over the level of a year earlier. For the first ten months of the fiscal year, corporate income taxes are up $56 billion over the corresponding period, but as we've all learned by now a vast majority of this improvement is a result of the much- maligned oil sector's success.

Next week, Fed watchers (and the Fed board itself) will be eagerly eyeing the release of the producer and consumer price indexes for July.

--One of the two or three biggest stories on the week was overshadowed by the terror plot; that being the shutdown of British Petroleum's Prudhoe Bay pipeline due to "severe corrosion." With about 400,000 barrels a day shut-in this is only 2% of daily U.S. oil consumption, but it's part of a wider problem these days as Cambridge Energy Research Associates' Daniel Yergin pointed out in an op-ed for the Wall Street Journal.

"The abrupt shutdown of the Prudhoe Bay oil field on Alaska's North Slope adds to the slow-motion supply shock that's been pushing oil prices up the 'wall of worry.' It comes on top of the interruption of production by insurgents in Iraq and Nigeria, continuing production declines in Venezuela since President Hugo Chavez consolidated his rule, and some supply that has yet to come back after last year's Gulf of Mexico hurricanes.

"Add it all up, and about 2.3 million barrels per day of capacity is currently out of commission. Though only about 2.6% of total world capacity, this loss is very significant in a market where the balance between supply and demand is so tight. It exceeds the extra 'spare capacity' that is the shock absorber for the oil market."

Longer-term, incidentally, Yergin is optimistic enough new sources of supply will be found to meet demand (I disagree), citing technology advances that will allow companies to produce more in deep offshore waters, Canadian oil sands, and liquids made from natural gas. But he adds:

"There are important qualifications, however. First, there is physical capacity to produce, not actual flows, which as we have seen over the last year can be disrupted by everything from natural disasters to government decision, to conflict and geopolitical discord. Second, while prices are going up rapidly, so are costs; and shortages of equipment and people can slow things down. Third, greater scale and technical complexity can generate delays. Still, a 25% increase in physical capacity by 2015 is a reasonable expectation, based upon today's evidence, and that would go a long way to meeting the growing demand from China, India and other motorizing countries."

"Opponents of opening the Arctic National Wildlife Refuge (ANWR) to oil drilling have long argued that the supply wouldn't make a difference to prices. Well, that claim took a spill yesterday with BP's announcement that it is shutting down its operations at Prudhoe Bay due to a damaged pipeline that could take months to patch.

"U.S. crude soared $2.25 on the news?.This market reaction came as some surprise to various newspaper scribes and politicians, given that Prudhoe Bay 'only' supplies about 400,000 barrels a day, or less than 2% of daily U.S. oil consumption.

"These are the same folks who've delighted in informing Americans in recent years that opening up nearby ANWR to drilling would 'only' result in an extra one million barrels a day. This argument - that ANWR isn't worth the effort - might have some currency if oil were plentiful and gas prices were still 'only' $1.50 a gallon. But with the margin between global oil supply and demand so thin, any supply counts. ANWR is exactly the sort of home-grown oil cushion that would help smooth out supply disruptions from the likes of Katrina or the BP lead, if 'only' Congress could get a clue."

Meanwhile, on a more micro level, the state of Alaska is losing $6.4 million a day in tax and royalty losses related to the Prudhoe Bay shutdown. 86% of state revenue comes from oil revenues so it's not a good time to be a state worker. Governor Frank Murkowski will seek some sort of redress from BP, though there is also late word BP may be able to keep open half the oil field while the problem is being fixed.

Of course BP's latest problem is but one in a worrisome series of major issues, including the catastrophic fire at its refinery in Texas City that killed 15, while a whistleblower has talked of incredibly lax maintenance on its Alaskan pipelines.

In case you are wondering as I was in the immediate aftermath of the shutdown just who supplies the pipe, and could benefit from new orders, it turns out Nippon Steel and U.S. Steel received the contracts for the work. However, for these two the resulting revenue is relatively insignificant to their bottom lines.

--On the ongoing topic of 'energy security,' Russia's Gazprom and Algeria's state-owned gas group have cut a deal to work together on liquefied natural gas projects. But Europeans, particularly the Italians, are concerned this will further increase their dependency on a limited number of gas suppliers. When you combine Gazprom, Algeria and a few other entities, over the coming decades the EU will rely on imports for 70% of their energy requirements against 50% today.

Of course if Russia was Canada, let's say, there would be no real concerns. But last I checked the Kremlin wasn't exactly peopled with the kinds of folks you'd trust to watch your house while you're away on vacation.

--According to a report by Global Investment House, OPEC oil revenues will reach $522 billion and $495 billion for 2006 and 2007, respectively, a 43% increase from 2004.

--A strike at the world's largest copper mine in Chile, the Escondida mine responsible for 9% of global supply, has not had an adverse impact on prices as of yet.

--The Bank of Japan held the line on interest rates as the pace of growth in the second quarter slowed, though there is strength in important areas such as machine orders, up 8.5% in June.

--The backdating of options scandal continues to widen. Three former senior executives at Comverse Technology were indicted for their roles in a wide-ranging scam to defraud investors.

In one instance, the three set up a slush fund and told assistants "to create dozens of phony employee names to be mixed in with real people on the list of options presented to directors for approval. The assistant merged first and last names of acquaintances to make the bogus names, the affidavit said. Hundreds of thousands of options were thus approved [by the compensation committee] with no real recipient, the government said." [Charles Forelle and James Bandler / Wall Street Journal]

In 2001 alone, the executives told the assistant to grant 10,000 options apiece to 25 more fake employees.

Broadly speaking, as the criminal filing in the Comverse case alleged, "The undisclosed paper gain in the options rewards an employee for prior service rather than providing an incentive for future service, without disclosure or shareholder approval of this kind of compensation." [Forgetting some of them didn't even exist.]

"The practice misleads investors about a company's profits and dilutes the value of outstanding shares, as well as obligating the company to sell shares to insiders at a discount, the complaint (further stated).

"A Federal Bureau of Investigation official, James 'Chip' Burrus, said the FBI is investigating 45 option-backdating cases. [The SEC is looking into even more.]? 'It's the corporate equivalent of placing a bet after the race has been run,' Burrus said."

I had to mention Chip, a classmate from Wake Forest. Not only a good guy, but his career path was predictable. We need more like him!

Continuing, Columbia University law professor John Coffee weighed in. "Federal securities laws make it a crime to knowingly circumvent any system of internal accounting controls or knowingly falsify any book or record or account. That's almost always happening in backdating cases."

Meanwhile, in the Comverse case, former CEO Kobi Alexander, who has dual citizenship in Israel, is believed to have fled there.

--Wal-Mart, clearly feeling the heat, agreed to raise wages at nearly a third of its 4,000 U.S. stores in an effort to remain competitive with other retailers and meet a need for workers and managers as it continues to expand. Some workers will see their paychecks grow by an average 6 percent, which means they may be able to cover the increase on a gallon of gas?..maybe. The average full-time hourly wage at Wal-Mart is $10.11.

--Google announced a joint venture with News Corp.'s MySpace "social networking" site, wherein Rupert Murdoch's Internet operations will receive guaranteed revenue of $900 million by 2010. Peter Chernin, News Corp.'s president, said "In one fell swoop we have paid off two-thirds of our Internet investments, we have gotten a 70% premium on our MySpace investment and are now playing with house money." [Financial Times] Sounds pretty good to me.

Separately, Google released a report saying click fraud is just not that big a deal. But in disputing an industry study by Outsell Inc. that estimated 14.6% of all clicks are fraudulent, Google didn't offer its own estimates. I'd say it's higher. [Washington Post]

--Venture capital group Elevation Partners, which counts among its partners Bono as well as the only $billionaire I've ever personally had a glass of wine with, Roger McNamee, acquired a 40% stake in Forbes Media for an estimated $250-$300 million.

--This is a bit worrisome, especially if you're a big American brand. Seven of India's 28 states have announced partial or total bans on Coca-Cola and Pepsi in the wake of concerns over pesticide levels in the soft drinks. Two of the seven have issued total bans, including Kerala, a communist state. [I bet a lot of Americans don't know this last bit?.I didn't myself until I was working there for a few weeks in 1985 (Cochin) and I had to deal with a loudspeaker blaring outside my hotel room all night.]

Both Coke and Pepsi say they are victims of a campaign by leftists to embarrass the government. So far, however, the campaign hasn't reached the major cities where a majority of the product is consumed.

--Finally, I told you I was worried about my carbon fiber play's earnings report and it turns out for good reason. You have to understand the CEO founded the carbon fiber business and he's an old-timer with long time horizons, so when the business goes down for maintenance before further expansion he really doesn't see it as a big deal. But for shareholders it is, and was, and so revenue in the June quarter was below estimates and the stock got whacked.

Now, however, I'm more confident than ever about future operations so I'm holding on. Yes, I wish I had jettisoned my shares at the top but I'm not a trader. The story's in tact, just a quarter or two behind where we should be.

What is interesting, though, is some of you remember my pain has been lessened by the fact I leant my shares out for a fee. Well, my broker / dealer just lowered the rate I was receiving because of lessening demand. "Send 'em back," I said, "I'll take it from here."

Iraq: I'm going to hold off on my own history of commentary here for another time (I mentioned last week I was going to unleash it on new readers), but for now there were two highly significant events amidst the non-stop carnage. First, Prime Minister Maliki strongly criticized both the United States and Iraqi militaries for the handling of a raid in Sadr City where a woman and child were killed, saying the botched operation threatened his reconciliation efforts. Then two days later we had the suicide bombing at a checkpoint near one of the Shiites' holiest shrines in Najaf which claimed 35 lives. What virtually every report failed to mention was that the bomber detonated himself (as he was being patted down) just blocks from Grand Ayatollah Sistani's home. It is the moderate Sistani who has evidently passed along word to the Bush administration (he doesn't speak to them directly) that Iraq's future is beyond bleak and this attack brings him one step closer to throwing in the towel. Sistani, after all, has held back Sadr and his Mahdi Brigades to a great extent and if you thought the civil war looked rough today, just imagine what it would be like if Sistani told Sadr to do what he had to do to protect the people.

Iran: Chief weapons negotiator Ali Larijani once again reiterated Iran will expand its uranium enrichment program and ignore the UN's 8/31 deadline, but he did still say President Ahmadinejad would have a response to the original UN package by 8/22. [And now that you've read Bernard Lewis's take above, you and I await 8/22 with some trepidation.]

Larijani also warned that if the UN levied sanctions against Iran for non-compliance, Iran would use the oil weapon. And there was new evidence Iran has been trying to import uranium from Africa, a fact just brought to light by Tanzania which discovered a shipment headed for Tehran last fall.

President Ahmadinejad, by the way, is being interviewed by Mike Wallace for "60 Minutes" this Sunday.

Afghanistan: The Taliban is very much alive and I read a depressing tale that offered further proof in The Times (of London), written by Tim Albone.

"Shot and hanged from the branch of a fruit tree, (a) mother and her teenage son were summarily tried, sentenced and executed for no bigger a crime than delivering clean laundry to a relative."

The relative was working as a policeman and the Taliban accused the two victims of being spies. The chief of police in Helmand province said "How could this boy be a spy. He was only 13?"

Australia is increasing its force in Afghanistan to 700 from its current 550, while it was a bloody week for NATO forces. Among the dead, three Americans and four Canadians, bringing the latter's death toll here to 26.

India / Pakistan: The two have expelled diplomats over spy charges and there is a clear undercurrent of tension in this critical region of the world that has been exacerbated by Pakistan's alleged ties to the recent Mumbai train bombings.

Yet, of course, it was Pakistan that helped uncover the airliner bomb plot this week. It plays a duplicitous game and one has to wonder just when it will give up bin Laden and Zawahiri?

North Korea: New analysis is coming in on Pyongyang's July 5 (July 4 in the U.S.) missile tests and it turns out that the only one of the seven to fail was the long-range Taepodong-2, despite previous reports to the contrary. The other six, experts now say, were actually within their target ranges and traveled 185-250 miles each.

But Kim Jong-il has not been seen since a day before the tests, highly unusual behavior for him, which is spawning rumors of some kind of internal conflict in the commie regime. Or perhaps he is seriously ill. Prior to this disappearance he had been quite visible, stepping up morale-boosting visits to military bases, for example.

Meanwhile, South Korea has relaxed its suspension of food assistance after the missile launches and is now sending $10 million in food aid to its flood-ravaged neighbor. Aside from what is deemed to be a staggering loss of life (far greater than the "official" death toll of 549), evidently North Korea's farmland is largely a total loss.

Taiwan: Taipei was down to 25 largely impoverished nations that continued to recognize it over the mainland, but now it's 24 with the defection of Chad.

Taiwan's Mainland Affairs Council blamed Beijing and said the move had humiliated the government. A top minister added "The Chinese government did all it could to threaten and blackmail Chad, leading it to break ties with us on the eve of Premier Su Tseng-chang's departure [for the nation.] What it does is mainly insult the Taiwanese government and its people."

Vice President Annette Lu Hsien-lien said the latest setback showed the mainland was the island's "real enemy." [South China Morning Post]

Japan: Prime Minister Koizumi appears set to make one last visit to the Yasukuni war shrine next week as he prepares to leave office in September. If he does so, it would further inflame tensions with South Korea and China. Yasukuni glorifies Japan's militaristic past.

Mexico: The Electoral Court ordered a partial recount of the July presidential vote, 9% of the polling places, and not the full one that leftist Andres Manuel Lopez Obrador had called for. So his supporters have spent the week blocking toll booths, bank entrances and the Treasury Department as he refuses to give in.

Dow Jones -1.4% [11088]
S&P 500 -1.0%[1266]
S&P MidCap -2.4%
Russell 2000 -3.2%
Nasdaq -1.3%[2057]

Bulls 40.2
Bears 37.1 [Source: Chartcraft / Investors Intelligence? bear reading slightly bullish?35 being normal. Reminder, this is a contrarian indicator.]

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