The U.S. foreign policy challenges for the world's troubled spots

Posted by Shyam Moondra

President Barrack Obama's handling of four major foreign policy challenges generally gets high marks. By nature, Obama tends to be cautious which usually is the right way to handle crises, except in some cases where his overly cautious approach makes him appear timid. Overall, Obama has demonstrated an even temperament and is on the right track. Following are the troubled spots, starting with the one with the most successful execution and ending with the one that could have been handled a little better.

Pakistan-Afghanistan:

Obama's firm policy on Pakistan, making financial and military aid conditional upon Pakistan's getting tough on extremists, is paying off. Of course, this policy was helped with the Taliban's strategic blunder in attacking Islamabad that triggered the alarm among Pakistanis and the rest of the world that the nuclear arsenal could fall in the hands of Islamic extremists. Pakistani civilian and military leaders deserve credit for rising up to the challenge and doing an incredible job in driving out the extremists from the Swat Valley. Many of the local tribal militias, fed up with the destruction that the Taliban brought to their communities, are also teaming up with the Pakistani military in driving out the Taliban from their villages and cities. Pakistan is now focusing on South Waziristan, the stronghold of the Pakistani Taliban and Al Qaeda, so this is still work-in-progress. If Pakistan continues to show resolve and finishes the job of flushing out the militants there, the U.S. should resume financial and military aid to Pakistan, as promised. However, the aid must be focused on strengthening the Pakistani democratic institutions and providing services to the Pakistani people. The U.S. must refrain from using the aid money to provide offensive weapon systems to Pakistan that could potentially be used against India and destabilize the region. The U.S. should also insist that Pakistan dismantle the training camps of Kashmiri extremists that carried out the terrorist attacks in Mumbai recently, thus paving the way for peace talks between India and Pakistan to finally settle the Kashmir issue.

Obama is correct in strengthening the military capabilities of NATO to root out the Taliban extremists from Afghanistan. Obama is also correct in impressing upon the Afghanistan's government that Afghanistan's future depends on eliminating government corruption, strengthening Afghanistan's security apparatus, providing services to the people of Afghanistan, and dismantling the drug trafficking infrastructure. Like in Iraq, we need to have an exit strategy so that eventually we can leave that area and let Afghanistan's people govern themselves without the presence of the NATO forces. We need to develop a plan which would enable us to start withdrawing our forces within five years.

Middle East Conflict:

Obama deserves credit for drawing a line in the sand on the issue of the Israeli settlements in the occupied territories. Israelis have consistently behaved as if they want to maintain the status quo, meaning continue to build settlements on occupied lands and keep collecting billions of dollars in the U.S. aid without giving any consideration at all to the suffering of the Palestinian people. That policy has served the interests of Israelis, as is evident from the considerable improvement in their living standard, but at the expense of Americans (who paid a heavy price over the years including the September 11, 2001 attack on our soil) and Palestinians, who have been forced to live in sub-human conditions. Obama is right in taking a more impartial and moral approach in resolving this longstanding conflict in a fair way. Israel must surrender the occupied territories in exchange for recognition of Israel by all Islamic countries in the region. Palestinians must have their own free sovereign country because that is the right thing to do. Obama should make financial and military aid to Israel conditional upon achieving the two-state solution as soon as Palestinians are ready with the governing institutional infrastructure in place – we need to increase the cost to Israelis for any unreasonable delay in achieving a comprehensive solution in the Middle East. Resolution of this conflict is essential for improving the relations between the U.S. and the Muslims and for de-radicalizing the Islamic world. Obama must be prepared to impose a solution if Israelis and Palestinians fail to achieve one on their own.

Now that the Obama administration has decided to reestablish diplomatic relations with Syria, it's important that Israel and Syria settle their conflict over the Golan Heights. If Obama continues to proceed on all Middle East issues in a fair and impartial way, it is conceivable that a comprehensive agreement involving Israel, Palestinians, and Syria could be hammered out within the next two years. If that happens, all Arab countries and Iran should recognize Israel and establish diplomatic relations with the Jewish state.

Iran:

A vast majority of the younger population of Iran is challenging the unelected mullahs that took over the government in the aftermath of the 1979 revolution. The Islamic revolution is failing because it has not evolved with the changing times of the Internet era and because of its rigidity that's unacceptable to the younger generation. Iranian authorities appear to have successfully used extreme violent means against its own people to stop people's peaceful protests against the fraudulent election that gave the incumbent President Mahmoud Ahmadinejad a big victory. However, the country is now fractured. The dreadful image of Neda Agha Soltan, a young woman, who was shot dead by a government militiaman, is way too powerful for the people to ignore. Only time will tell if the sacrifices made by the courageous Iranian people will bring any positive changes in Iran. If history is any guide, dictators, who oppress and terrorize people using their militias (or thugs, as many people would call them), eventually fall. It would be hard for Ahmadinejad to survive as a president, if he is viewed as illegitimate, not just by the outside world but by the Iranian people themselves. Hopefully, what will come out of the popular dissent is a reformed moderate Islamic government that will provide more freedoms to its people and the press and treat women with equality.

President Obama's approach to the Iranian crisis has been the right one. Obama could have used hard-hitting rhetoric, but that would not have changed the situation on the ground there. The fight for freedom has to be fought and won by the Iranian people themselves. Obama's strong condemnation of the violent means used by the Iranian authorities against peaceful demonstrators was all he could do under the circumstances. By not directly commenting on the election process itself and focusing on the brutality of the Iranian police, Obama has taken a high moral road. This approach has given Obama an upper hand in any future negotiations with much weakened Ahmidinejad. There seems to be a good chance that Iran will agree to a deal whereby it continues with the civilian nuclear program with appropriate U.N. monitors and inspectors in place to make sure that they do not pursue a clandestine weapons program. In return, all sanctions against Iran will be dropped and Iran's isolation will end. A country, which is not isolated, is more likely to play a constructive role in addressing the problems of mutual interest.

North Korea:

Obama has had mixed success on the question of North Korea. The U.S. was able to get an anonymous vote in the U.N. Security Council on the resolution that imposes tougher sanctions on North Korea. However, North Korea has not only conducted a second nuclear test but has also fired more missiles in defiance of the demands of the international community.

North Korea has apparently calculated that the U.S. is tied down in Iraq and Afghanistan and thus would have no stomach for initiating yet another bloodier military confrontation with North Korea. North Korea may have planned all along, while still participating in the Six-Party talks, they will continue with their nuclear weapons and medium- and long-range anti-ballistic missile programs. The nuclear weapon and missile technologies may become a trophy in their hugely successful armament export business. By selling illicit technologies and weapons to other countries such as Iran, Syria, and Venezuela, in violation of the Non-Proliferation Treaty, they can earn badly needed hard currency that they use to buy the essentials for their population.

North Korea is militarily much stronger than Iraq with proven missile technology and possibly a few nuclear bombs. A military option is thus not viable. North Korea's economy is in bad shape. Therefore, if the international community is able to choke off the armament sales and thus shutdown this source of hard currency, it would be virtually impossible for North Korea to survive as a self-sustained country for long. Also, the banking sanctions will bite the elite members of the government, making them more agreeable to reach a negotiated settlement incorporating the following elements:
· Nuclear and missile weapon systems and development efforts to be shut down in a verifiable way and North Korea to fully comply with the Non-proliferation Treaty.
· The West to establish diplomatic relations with North Korea and provide security guarantees.
· North Korea be given economic development aid and supplied with much needed food and energy.
· North Korea to agree to respect human rights and grant its people more freedoms.
· Emphasis be placed on people-to-people contacts, cultural exchanges, and tourism (providing another source of hard-currency).

Financial markets today are not random, nor efficient, nor rational, but they are manipulated

Posted by Shyam Moondra

Over the last few decades, the economists have variably characterized the financial markets as random, efficient, and rational. However, in the last ten years, with the emergence of computerized day trading by investment banks and hedge funds and increased trading in derivatives, the true characterization of the markets today would be "manipulated."

It's a well-known fact that today's increased volatility in stock and commodity markets is primarily due to manipulation by investment banks and hedge funds through their frantic computerized trading. Jim Cramer, a TV commentator, once posted a video on his website explaining how he, as a former hedge fund manager, used to throw $25 millions or so and move a particular stock up or down as he wished. The investment banks and hedge funds short sell a stock to push it down (often spread false rumors about the targeted company to aid the process of bringing it down as was done in the case of Bear Stearns and Lehman Brothers) while also trading in options. Then just before the monthly options are to expire, they start covering their short positions and push the stock up. In the process, they may lose some money in trading stocks but they make proportionately more money in options and thus come out ahead. Sometimes they move a particular stock up or down to make the options they wrote worthless and thus pocket the premium the buyers paid. They repeat the process every month in many targeted stocks and make money at the expense of unsuspecting small investors. Some of these big players also use what is known as "pump-and-dump" strategy in which they take substantial long position in a company, usually a lesser-known small-cap company, and then publish inflated views or research reports about those companies that help move the stock price up ("pumping"), enabling them to sell their holding at a profit ("dumping"). Often, investment banks issue a positive research report to pump-up a stock so that their best clients can dump the stock, or issue a bad report on a stock to push it down so that their best clients can buy that stock. Some times these big players use their research departments to make money in the trades for their own accounts. As an example, Goldman Sachs' research department was touting that oil was headed to $200 per barrel while at the same time they reportedly held long positions in oil. It's also reported that some investment banks were selling mortgage-based securities to others while at the same time they were short selling those securities.

The investment banks and hedge funds call the above trading practices as "investment strategies" and deny that they are engaged in unlawful manipulation. The fact is that if a market player can make a stock or commodity move in a certain direction at will, then that's manipulation.

The stock markets were created to help companies raise capital so that they could build new factories and hire more workers and the stock prices moved up or down based on the companies' fundamentals. Now the markets move up or down in a yo-yo fashion without any change in underlying fundamentals. The increased volatility caused by manipulation in the markets has turned the markets into gambling casinos, hurting the free-market economic system.

We urgently need new regulations to stop market manipulation by the investment banks and hedge funds. The government could take a number of actions such as:
· Ban naked short selling, limit short positions to 1% of outstanding shares at any given point in time, and reinstate the "up tick" rule for short selling.
· Regulate hedge funds like any other mutual fund. Their CEOs and other officers must pay taxes at the regular rates as opposed to at the capital gains rate as they do now.
· Investment banks and hedge funds must be required to hold stocks they buy for a certain specified minimum period before they can sell those stocks. Or, as Louis Gerstner, the former CEO of IBM, has suggested, short-term gains should be taxed at a hefty rate of 80%, which will discourage day trading and thus reduce volatility.
· Change the margin rules so investment banks and hedge funds are limited to leverage of no more than 10:1 (in the recent past they have had leverages of up to 40:1).
· Impose a limit on how much options trading investment banks and hedge funds can do in any given stock.
· The investment banks must not be allowed to own research business. Currently, they have arm's length relationship between their trading and research departments which is not enough.
· Pass tough laws to discourage "pumping-and-dumping" so that big players can't make money at the expense of small investors.
· Strengthen SEC resources to investigate and enforce the laws vigorously to stop market manipulation. The CEOs of the companies that are found to violate any of the new regulations must be given mandatory jail terms and their companies must be fined heavily to discourage them from manipulating the markets.
· Change the tax laws to stop investment banks and hedge funds from escaping from paying their fair share of income taxes. In a recent quarter, Goldman Sachs paid only 10% in taxes because they executed their trades through a complex web of offshore subsidiaries and hedge funds that made it possible for them to reduce their tax levies. It's time we close all these tax loopholes.
· Put restrictions on how much commodities investors can buy. It's believed that the recent sharp oil price increase was not because of imbalances in demand and supply but was driven by speculators.

Health care reforms must reduce costs by at least 30%

Posted by Shyam Moondra

President Obama has made health care reform as his number one domestic policy goal. Obama and others talk about two major problems related to health care: the swelling ranks of uninsureds and rapid increase in the health care cost. In fact the sharply escalating health care cost is the primary reason why millions of people can't afford to buy health care insurance. Therefore, if the Obama plan is able to bring down the costs by at least 30%, the problem of uninsureds will dissipate. Those who are too poor to pay for health care could be dealt with as a separate issue as part of the reforms concerning the Medicaid program.

The main reasons why health care costs are increasing at a much faster rate than the overall inflation and what could be done about them are as follows:
· Unchecked greed of service providers such as insurance companies, drug manufacturers, hospitals, and doctors. The industry environment permits the service providers to increase the rates as they please to earn a hefty profit. They are treating health care as a cow they could milk to the hilt. This issue could be addressed by introducing a non-profit government administered plan or by regulating the profit margins of the service providers in the same manner as many of the utilities are regulated today.
· Insufficient competition in the industry. There appears to be a conspiracy among the service providers when it comes to pricing their products and services. If a government sponsored plan is introduced, it will force the competing carriers to moderate their pricing policies. We could also have new anti-trust regulations specifically designed for the health care industry. In addition, we need to reform the patent related laws to permit the introduction of generic drugs sooner.
· Unnecessary tests and treatments. Doctors often prescribe tests not because they are really needed but just to protect themselves from potential malpractice lawsuits. The fear of lawsuits drives them to be 100% sure on all aspects of health care. This "care-to-perfection" is often unnecessary and it adds to the costs enormously. Doctors and hospitals collude to push for expensive surgical procedures that yield more income for them even though there may be cheaper alternatives available that would be just as effective. This issue could be addressed by reforming the malpractice laws and by developing standards for medical treatment.
· Patients' attitude of indifference. The patients often ignore the costs so long as a treatment is covered by insurance (even though this eventually ends up costing them more in terms of higher insurance premium and co-pay/deductibles). We need to come up with a plan which will induce the patients to weigh in the costs involved when choosing service providers or making decisions on treatment alternatives, just as they would when they buy other non-health care products and services.
· Health care system inefficiencies. The paperwork and record-keeping procedures tend to be cumbersome that add to the health care costs. The government could help develop a comprehensive solution that takes advantage of the modern information technologies.
· Lack of medical knowledge on the part of population. People often end up seeing a doctor or not being able to make wise treatment choices because they are not knowledgeable enough about medical care. We should make education about medical care and prescription drugs for common ailments mandatory for most people. If people achieve the required level of understanding about medical care, they should be awarded a certificate which would allow them to get certain medicines (e.g., antibiotics) without a doctor's prescription. If people are able to treat common ailments such as cold, diarrhea, heartburn, constipation, high blood pressure, etc. they will have fewer visits to doctors and thus reduce the cost of health care. If people can learn how to repair automobiles, I am sure they can also learn how to treat common health problems themselves.

The escalating health care costs are negatively impacting families and businesses alike. Up to this point, in the face of government inaction on this issue, many employers are washing their hands off this problem by cutting back employee/retiree's health benefits and increasing co-pay and deductibles. The escalating health care costs are also making American companies less competitive in the global market place. The Obama administration is thus correct in making health care reform as the number one priority. Republicans must work together with Democrats in an objective manner, free from any pre-conceived ideologies, to reign in the health care costs. Any proposal that doesn't reduce the health care costs by at least 30% should be viewed as a sham. In the next round of elections, the American people would not hesitate to punish those who are creating obstacles in achieving meaningful reforms.

Headed for a second round of economic slowdown?

Posted by Shyam Moondra

Economy seems to have stalled. Look at the following trends:

· While the number of new weekly unemployment claims is going down, it is still very high (in the 600,000-range) and the total number of people receiving unemployment benefits continues to rise, currently standing at little under 7 millions. It's now almost certain that the unemployment rate will exceed 10% and may even go over 11%.
· While the latest retail sales data for May shows an increase of 0.5%, that increase reflects a burst of auto demand generated by the tremendous bargains being offered by the auto dealers many of whom are going out of business and are in the process of liquidating their inventory (but these bargains can't be sustained indefinitely) and higher gasoline prices (consumers are buying the same amount of gasoline but paying more). Therefore, the consumer demand is not quite as robust as the retail sales data might suggest.
· In recent weeks, the prices of oil and other commodities have increased substantially, raising the specter of inflationary expectations. These price increases are being driven not by any demand-supply imbalances but because of speculative purchases by investors. Oil and gasoline prices are now double of what they were a few weeks ago, crimping consumer spending.
· Interest rates have started to increase with the 30-year fixed mortgage rate now almost 25% higher than what it was a few weeks ago. Higher interest rates have already stalled the mortgage refinance activity. The number of foreclosures continues to be at near record levels and as the interest rates rise even more, this number will only get worse. All of these trends will have a negative impact on the home sales and home prices in the coming weeks and months. Recent stress tests conducted by the Department of Treasury may require financial institutions to raise additional capital in the future, thereby slowing the financial market's recovery.
· Dollar is plummeting, diminishing its role as the world's reserve currency. The creditor countries such as China may be reluctant to invest in the U.S. securities at the same level as they used to, driving up the interest rates even more which will delay the economic recovery. While a weak dollar may stimulate exports, it will also lead to higher import prices which will aggravate the inflation problem.
· The trade and budget deficits are increasing which means weaker dollar, higher oil and commodity prices, and higher interest rates down the road.

The Obama administration has been too slow in spending the stimulus money. Congress has been too slow in finalizing the regulatory regime for the twenty-first century. Deteriorating economy combined with speculative trading by investment banks and hedge funds could trigger an economic crash. President Obama has been spending too much time on overseas trips and his absence has hurt the economy. In the beginning he was a hands-on president, but lately his execution on economic matters has been sub-par. Obama and Congress need to come up with a new plan, perhaps another stimulus package, or else we are likely to have a relapse of an economic slowdown.