In the wake of President Obama's decision to scrap the U.S. missile defence shield in eastern Europe, many are pondering Russia's response. The relationship will remain in the spotlight this week, when President Medvedev heads to the U.S. for the G20 summit. Although the precise nature of Russia's reaction remains to be seen, it has a big incentive to improve relations. It badly needs American investment and co-operation to help solve serious economic problems at home.

Critics of Obama's decision worry that it will "embolden" Russia, causing more aggressive behaviour abroad. Yet they forget that the Bush administration's antagonistic policies failed to provide security to Russia's neighbours. These policies didn't prevent Russia's war with Georgia, the repeated gas disputes with Ukraine, and a serious cooling of relations with countries such as Poland. Far from being restrained, Russia's confrontational attitude had a lot to do with its perception that the U.S. was busy encircling the country with missile bases and alliances.

The critics also imply that Russia is preoccupied with external expansion, but that hardly seems appropriate today. Russia's GDP is set to plummet by 8 percent this year. Russian analysts estimate that the country needs up to $2 trillion to renovate its dangerously clapped-out infrastructure. In major industrial cities, Russia's dilapidated factories are mulling huge job losses. For the foreseeable future, Russia's leaders are likely to be preoccupied with thorny domestic problems.

Faced with such daunting challenges, it's entirely logical that both Medvedev and Putin say they are keen to kick-start American trade and investment. Responding to Obama's decision -- which he described as "brave and correct" -- Putin immediately linked it to economic issues. He called for the U.S. to back Russia's entry into the World Trade Organisation (WTO), and scrap Soviet-era trade restrictions against Russian companies, especially those that regulate technology transfer to Russia.

On the same day, at an investment summit in Sochi, Putin held well-publicized meetings with the CEOs of General Electric, Morgan Stanley and Texas Pacific Group -- all major U.S. companies. When it comes to the economic sectors that Russia says it is most eager to develop, American investment will be especially crucial. The crisis has underscored the need for Russia to wean itself off dependence on natural resources, and develop new high-technology sectors, such as IT and nanotechnology, where U.S. companies are at the cutting edge.

This means that the U.S. still has plenty of bargaining chips left as it seeks to gain Russia's cooperation on global issues. The bigger problem could be persuading U.S. investors to come. No matter how much Russia's leaders appear to welcome foreign investment, there remain huge obstacles, including corruption and bureaucracy, which they seem largely powerless to deal with.

Nor does the tentative thaw mean an end to diplomatic tensions. Russia's relations with its immediate neighbours may well remain stormy, potentially causing renewed strains with Washington. Still, it's hard to argue that by extending his olive branch to Russia, Obama increases the likelihood of such upsets. The evidence of the last few years implies just the opposite. The frostier Russia's relations have been with the U.S., the more determined Russia has been to resist U.S. encroachment in nearby countries, increasing regional tensions.

Now, Obama's gesture has opened up the possibility of a fresh start, creating prospects for mutually beneficial economic cooperation. The Russians would be foolish not to jump at that opportunity.

Wall Street would like you to believe that when investment banks take on risk they are largely doing it for the benefit of investors -- maybe even you and me.

Bankers say much of the capital that their firms put at risk each day is to complete trades for big corporations, mutual funds, pension funds, hedge funds and university endowments. And contrary to the conventional wisdom, proprietary trading -- bets made for a bank's own behalf -- is really just a small part of their business.

Lately, Wall Street's captains of capitalism have been aggressive in pushing the "we take big risks for our customers, not for ourselves" line of argument.

That's especially so in the wake of the public furor over the outsized trading gains at the big banks like Goldman Sachs Group, JPMorgan Chase and Barclays and even Citigroup, so soon after the collapse of Lehman Brothers.

The notion that risk is being taken for customers as opposed to for the firm's own benefit is somehow supposed to make it seem more palatable and somehow less risky.

Still, for many, the image persists that investment banks spend a lot of time and resources gambling on stocks, bonds, commodities or currencies to generate fat profits and big bonuses. And there's good reason for that image: Wall Street firms don't break out the dollars they take in from client trades versus those generated by prop trading.

Yet from the perspective of Wall Street bankers, it's perfectly logical to see much of their risk taking simply as part of trades for their customers.

Here's how:

Let's say a hedge fund calls up an investment bank and asks it to help buy a large block of shares, but it doesn't want to pay much more than a given sum and intends to finance part of the transaction. That may force the investment bank to commit some of its own capital to acquire those shares in a series of separate transactions, so as not to create an undue spike in the stock's price.

To protect itself from losing money, the investment bank may go out and enter into a number of other trades or derivatives transactions -- all intended to reduce, or lay off, its risk of a loss on the customer transaction.

And in all likelihood those follow-on trades will prompt the investment bank to engage in a series of other trades to minimize its exposure to something going awry with those hedges.

At the end of the day, what looks like a simple customer order to buy stock on margin may end up creating a daisy chain of transactions that the customer wasn't even aware were taking place. But in the mind of a Wall Street banker, all these follow-on trades are simply part of the process of completing the customer's order.

Not surprisingly, some of these follow-on transactions can rake in sizeable revenues for a bank's trading desk. That's how an ordinary customer request to buy stock can generate revenues far in excess of whatever fees the initial trade may have produced.

Of course, if things go wrong, an investment bank can just as easily lose money on some of these follow-on transactions, and that's why there's risk involved in the process.

It's hard to see what distinguishes some of these transactions from what an outside observer might label as prop trading -- a group of traders sitting around with a pile of firm capital to do with as they please. But that's not the way that bankers think about customer trades.

Maybe it's all just a case of semantics, and trying to make a distinction between customer trades and prop trading is fruitless. Ultimately, maybe all trading activities by investment banks should just be viewed as risky.

The key to taming the giant banks is to put them in a position where they must turn away customer business because of the potential risk associated with all these follow-on trades.

One way to do that would be to impose hard-and-fast caps on the size of bank balance sheets, as it would deter them from engaging in transactions that add to their assets and liabilities. To avoid any unfair advantage, the caps on bank balance sheets would have to be agreed by regulators and policy makers around the globe.

But a balance sheet cap would be easier to impose and monitor than the increased capital holding requirements Treasury Secretary Timothy Geithner is proposing for global banks.

And better yet, a balance sheet cap would have the added benefit of fostering more competition between banks by driving some business to smaller institutions.

After just six weeks as NATO secretary-general, Anders Fogh Rasmussen has his first crisis. The alliance may be slowly bleeding in an intractable war in Afghanistan, but the immediate cause is the U.S. administration's decision to shelve a planned missile shield due to have been built in Poland and the Czech Republic.

The shield, energetically promoted by former President George W. Bush, was designed to intercept a small number of missiles fired by Iran or some other "rogue state". But Russia saw it as a threat to its own nuclear deterrent and NATO's new east European members saw it as a useful deterrent against Russian bullying, by putting U.S. strategic assets on their soil.

President Barack Obama's decision to drop plans to install it on Polish and Czech territory leaves those former Soviet satellites feeling betrayed -- because they expended political capital to win parliamentary support -- and more exposed to a resurgent Russia, especially after its use of force against Georgia last year.

Obama's move is clearly part of a warming of U.S. relations with Moscow from which Washington hopes to gain help in return on supply routes to Afghanistan, pressure on Iran to rein in its nuclear programme, and an agreement on radical cuts in nuclear arsenals. But this "reset" of U.S.-Russian relations has only exacerbated the rift within NATO over Russia.

The three Baltic states and Poland were particularly critical of NATO's low-key response to Moscow's military action in Georgia. Some said the refusal of west European allies led by Germany and France to agree at a NATO summit last year to putting Georgia and Ukraine on a path to NATO membership emboldened the Kremlin to act. President Dimitry Medvedev's harsh attack on Ukraine's leader in an open letter last month fanned their fears of Russian bullying of its neighbours.

East European officials cite Moscow's playing with the gas taps and trade disputes, and its apparent determination to keep its Black Sea fleet in the Crimean port of Odessa Sevastopol beyond a 2017 deadline agreed with Ukraine as part of a strategy of tension intended to reverse the "colour revolutions" in Kiev and Tbilisi, and bring other former Soviet republics to heel.

All that makes it a particularly awkward moment for Rasmussen to deliver his inaugural keynote speech on NATO-Russia relations on Friday in Brussels. The former Danish prime minister has put a few noses out of joint in his first weeks by making clear he intends to run NATO in a more results-oriented way, leaving less room and time for ambassadors in the North Atlantic Council to debate any idea to a standstill. He has set strict time-limits on council meetings, streamlined flabby agendas and outsourced the drafting of a new Strategic Concept to a group of 12 experts led by former U.S. Secretary of State Madeleine Albright, on which not all allies are represented.

His personal management style and high media profile (monthly news conferences, a blog and Twitter chatter) has sharpened the traditional Kabuki dance in which a new boss and the old board flex their muscles at each other in mutual suspicion, insiders say. It is the first time a former prime minister, used to running a government and to talking to fellow national leaders, has been picked for the job. Previous secretaries-general were former defence or foreign ministers, more accustomed to being servants of the member nations.

Both camps within NATO (which privately brand each other the "Friends of Russia", and the "Cold Warriors") will be watching every word of Rasmussen's Russia speech to ensure he does not depart from alliance policy. The fact is that NATO has been unable to agree on an overall policy towards Russia since the 1990s, when it declared that Moscow was no longer an adversary.

Rasmussen hopes to launch NATO's own modest "reset" of ties with Russia, offering closer cooperation on Afghanistan, a joint threat assessment and work on non-proliferation of nuclear weapons. NATO officials have received assurances that Moscow will respond positively and breathe new life into the NATO-Russia Council.

None of that will assuage NATO's east European members, who are likely to press harder now for practical steps to give credibility to the alliance's Article V mutual defence commitment. That could involve drafting military plans to reinforce the Baltic republics and Poland, and holding joint military exercises on those countries' territory. The French and Germans have resisted such ideas in the past as unnecessarily provocative to Moscow. If NATO cannot agree to such moves, the United States may have to do more on its own to compensate its jilted friends.

(note: corrects Odessa to Sevastopol in 6th paragraph)

A year after Lehman Brothers collapsed, policymakers are still getting to grips with the key question raised by the Wall Street firm's fall: how to ensure that the failure of a large bank does not jeopardise the entire financial system.

After much debate, politicians and central bankers are warming to the idea that banks should make preparations for their own failure. This plan -- memorably dubbed a "living will" by Mervyn King, governor of the Bank of England -- would allow regulators to wind down even large, cross-border institutions without putting public money at risk.

Alistair Darling, Britain's chancellor, wants to introduce legislation this autumn to force banks to draw up living wills. Such plans have drawn predictable squeals from bank executives, who claim the idea is hard to implement for large cross-border groups. They have a point. Nevertheless, bankers should embrace the idea, for the simple reason that it is better than any of the alternatives.

The status quo is no longer acceptable, so policymakers have three choices for dealing with large, systemically important financial institutions. The first is to make them smaller so that the collapse of any one bank would no longer threaten the system. The second option is to take a "zero failure" approach to regulation, along the lines of safety rules in the airline industry.

Both of these approaches have flaws. Small banks still pose a risk if they all collapse together. And preventing failures entirely would require a level of regulation that would stifle innovation and further reduce competition in financial services.

By contrast, a system of living wills would be far less intrusive. This is not to suggest the switch would be straightforward. Differences in national insolvency laws mean it is currently impossible to establish a consistent approach to winding up complex cross-border institutions. Politicians' desire to protect local depositors and taxpayers -- often at the expense of foreigners -- also complicates matters. Simplifying corporate structures that have evolved over decades will also not be easy.

And even assuming that all these problems can be overcome, governments would still struggle to convince investors that they were really willing to use their powers.

Yet rather than resisting change, banks should welcome it. If the industry can come up with a credible mechanism that protects taxpayers from its mistakes, it can make a case for maintaining some commercial freedom. This may not be simple. But the alternatives are even less attractive.

A year after the government's seizure of Fannie Mae, Freddie Mac and AIG , not to mention the bankruptcy of Lehman Brothers that sent the global financial system into a tailspin, very little has changed to prevent debt from being sliced and diced, again and again.

This is a mistake. Although there were many factors contributing to the downfall of the global financial system, the repackaging of toxic debt into esoteric financial products was at the heart of the credit crisis when it erupted in 2007.

It's easy to forget, particularly when many are focused on anniversary tick-tock accounts of the last days of Lehman Brothers, how nasty CDOs -- or worse, CDO squareds -- became so incredibly popular in the first place.

Yet, after all the damage, the trillions of dollars lost and the biggest state intervention in financial markets since the Depression, there has been no movement to ban their creation.

Securitization in its broadest form -- taking underlying collateral, bundling it together and selling it as tradable debt -- is still hailed as an important 20th-century invention that has helped worthy borrowers get the credit they need to buy a home, car, or education that would otherwise be out of their reach.

Policymakers, understandably, are anxious to get it started again after the market snapped shut last year. Wall Street, and investors taking advantage of generous financing from the Federal Reserve, are happy enough to oblige.

And it has worked. As of last week, new bonds backed by consumer debt reached $100.5 billion for the year, according to Barclays Capital. While a fraction of the pre-crisis market, that deal volume represents a healthy revival of a near-dead business. Three-quarters of the new deals are eligible for Fed financing.

The problem is phase II -- when these securities are then repackaged into something else. At the margins, it's already under way. Banks are repackaging problematic bonds backed by residential mortgages and the current disaster zone, commercial real estate loans, so they can slice off a new piece that can be resold with better protection.

The amounts are still small, but it's a reminder of the temptation to shift around a problem asset so investors can feel better about risk.

Although securitization has been around for more than 30 years, the housing and credit boom combined with the computing power of the 21st century gave rise to the proliferation of these repackaged goods filled with bad home loans.

Home loans, though, were just the most bountiful fodder to be found. The next go-around could involve using, say, bonds backed by life insurance policies -- the resurfacing fad among Wall Street banks -- as the building blocks for a new product.

In the name of simplicity and transparency, the repackaging of securities should just be banned, as I've argued before. This will ensure that junky debt doesn't get cut into so many pieces that understaffed regulators, rating agencies, investors and bank executives lose track of just who is left holding the bag should things head south.

Much of the public outcry and regulatory fervor has been focused on the banks and their reluctance to give up big bonuses for a job well done, or done badly as the case may be.

This is understandable, given the hardship banks and their creations have caused, but this won't necessarily prevent creative innovation from running amok.

Keeping banks from creating new products out of old ones will go a long way to make sure we're not right back where we started when the next crisis unfolds.

The Year Since Lehman -- related columns:

A year after Lehman, the good news

Banking? Keep it simple, stupid

A year on, it's still a housing story

Sometimes legal fishing expeditions pay off.

A year ago, a Connecticut hedge fund sued UBS, contending that it knowingly sold toxic mortgage-backed securities to institutional investors but never disclosed that information.

At the time, the accusation by the fund, Pursuit Partners, seemed intriguing. But because the complaint lacked any sign that it had the beef to back up its potentially explosive claim, the litigation all but fell off the radar screen.

Now, it appears the hedge fund managers were onto something, thanks to a Connecticut state judge's decision to allow Pursuit's lawyers to get limited access to some of UBS' internal emails.

In some of the emails, the investment firm's employees describe the $35 million in collateralized debt obligations sold to Pursuit in summer 2007 as "crap" and "vomit."

At first glance, it might be easy to chalk this up as simply another case of Wall Street bankers peddling securities they privately thought were junk.

But the big revelation unearthed by Pursuit's lawyers is the extent to which credit rating agency Moody's Investors Service shared information with UBS about its impending decision to lower its ratings on some of the CDOs the firm was selling.

In short, what struck a chord with Connecticut Superior Court Judge John Blawie is the evidence that Moody's gave UBS a sneak peak into its decision-making process and that UBS used the information to its advantage. In ordering UBS to post a $35 million bond in advance of a trial, the judge said the firm's bankers "were in possession of material nonpublic information regarding imminent ratings downgrades."

The judge didn't call what UBS was doing insider trading. But that's one way to think of the critical allegation in this case.

And that's why the Pursuit case could be bad news not only for UBS, but for other investment banks that packaged and sold exotic securities that were dependent on getting a stamp of approval from one of the major credit rating agencies.

It's doubtful that this sharing of information between a rating agency and a Wall Street bank was an isolated event.

In one of the emails turned over by UBS and cited by Blawie, a banker is quoted as saying, "It sounds like Moody's is trying to figure out when to start downgrading, and how much damage they're going to cause -- they're meeting with various investment banks."

That email should prompt some enterprising securities regulator or prosecutor to begin asking bankers at UBS and other firms who were packaging CDOs in the spring of 2007: What did you know and when did you know it?

In response to the bond order, a UBS spokeswoman said that "the decision by the Connecticut Superior Court is a preliminary procedure to require defendants to post security while a case is pending, nothing more," adding that the bank expects to prevail in the case.

It's less clear whether Moody's, which also is a defendant in the Pursuit lawsuit, has any liability. There's nothing to indicate that Moody's had any knowledge of UBS' plan to sell the CDOs to Pursuit.

A spokesman for the rating agency said Moody's believes the claims against it are baseless.

The litigation sheds light on the all-too-chummy relationship that exists between the big rating firms and the investment banks.

And it's just one more reason why the Obama administration needs to push harder for reforms that would make it easier for smaller credit rating firms to compete for work with the two big gorillas of the debt-rating world.

That's a lot of heat coming from a lawsuit that most on Wall Street weren't even aware of until this week.

In the wake of the widespread chaos that accompanied the bankruptcy of Lehman Brothers last September, regulators have sought to find a better way to unwind global financial giants. One approach is that the banks themselves should prepare for their own orderly demise -- a kind of "living will".

That idea has been gathering steam of late. The G20 group of finance ministers and central bankers meeting in London over the weekend agreed to require "systemic firms to develop firm-specific contingency plans."

The concept has wide appeal. The crisis has convinced politicians and regulators of all colours that even large financial institutions must be allowed to fail without imposing a huge burden on taxpayers. Many bankers see such a regime as a preferable alternative to more intrusive regulation.

However, drawing up a detailed "living will" is easier said than done.

Simon Gleeson of Clifford Chance argues that it is more important for regulators and legislators to establish a cross-border crisis-management and resolution regime than it is for individual firms to prepare for their own demise.

The mandate of the Financial Stability Board (FSB), the international body comprising finance ministries, central banks and financial regulators, was recently expanded to include contingency planning for cross-border crises. It published a series of relevant principles in April. However, as the Institute of International Finance (IIF) noted, it is "clear from the high-level nature of the principles and the aspirational language [that] there remains a lot to be done."

The IIF is calling for the FSB to develop a convention on crisis management that would include detailed rules, including on early intervention. It also wants the FSB to run cross-border crisis simulations of the sort routinely carried out by domestic regulators.

But crisis-handling is only half the battle. Once a bank collapses, national priorities currently kick into action, not least because the responsibility for a bail-out rests with elected finance ministers rather than the technocrats who run financial regulators or central banks.

Politicians' instincts will always be to minimise the harm to their own depositors, creditors and banking systems, regardless of the global cost.

Solvency law reinforces these nationalistic instincts. Like financial markets law, it is bounded by national borders. Administrators allocate the bank's remaining assets among local creditors, regardless of the claims of creditors overseas. Indeed, they are often prohibited from cooperating with their foreign counterparts, even if they wanted to.

Solvency law is also wholly inadequate to the task of unwinding huge, interconnected financial firms.

One solution, as floated by Adair Turner, chairman of Britain's Financial Services Authority, would be to require international banks to simplify their corporate structures. But this is likely to be resisted by the banks as it would eradicate all the efficiency benefits of a cross-border structure, as well as exposing tax-minimising schemes.

Instead, the IIF advocates that governments agree criteria for burden-sharing ahead of another crisis. A common fund could be established across borders, though the IIF sensibly recognises that the political challenges would be huge.

More pertinently, the IIF advocates that banks should be subject to a special resolution regime separate from those of regular commercial companies. Central to such a regime would be a cross-border agreement that governments could step in and override normal insolvency practices in order to avoid systemic disruption of the banking and payments systems.

Some of the issues posed by the financial crisis are intellectually difficult; some politically challenging. Devising a legal framework for "living wills" manages to be both. Any solution for dealing with a future Lehman remains a long way off.

The Year Since Lehman -- related columns:

Banking? Keep it simple, stupid

A year on, it's still a housing story

In 1873, Walter Bagehot wrote that "the business of banking ought to be simple; if it is hard it is wrong." He would have struggled to recognize today's banking system.

It is not just ever more ornate derivatives that bend the mind. Financial firms themselves have become fabulously complicated. Citigroup lists 2,061 subsidiaries and affiliates while the institutional chart of JPMorgan Chase is 267 pages long.

Complexity -- as Bagehot predicted -- has become a curse. If nobody can understand financial firms, they will become ever more accident prone.

The crisis that exploded a year ago offered a salutary lesson in the dangers of complexity. Many shareholders and creditors simply did not fully comprehend their investments. Instead they were forced to trust managers and the rating agencies.

Regulators too could be forgiven for scratching their heads.

"Supervisors are at a decided disadvantage in understanding risk-taking and compliance for firms that might involve dozens of jurisdictions, hundreds of legal entities and thousands of contractual relationships," former Fed official Vincent Reinhart has written.

Indeed Basel II -- the international capital code -- was an admission of defeat by regulators. The message from the banking accord was that institutions had become so convoluted that only they were able to understand the risks they were taking.

Yet many intelligent executives of these same institutions failed spectacularly. It is no mean feat keeping tabs on an army of specialized financial engineers, lawyers and accountants.

As Robert Rubin, the former Treasury Secretary and Citigroup executive, acknowledged last year on the Charlie Rose show: "Unless you are either running the trading operations or running the independent risk management, you are not going to know the risk well enough to have a real sense of where those risks are."

Making financial firms simpler will be far from simple.

One approach is coercive. Regulators can make it very uncomfortable to be big. Capital requirements that ratchet up with size would encourage firms to split themselves up into their component parts, giving managers and regulators a better shot at following what is going on. On the whole, smaller firms tend to be more straightforward.

Failing this, Reinhart has proposed a Lego model, in which financial firms would be composed of "well-defined modules." A company made of units that can be easily disconnected from the whole would be easier to manage, with individually simple parts. Regulators can foster this model by insisting on a "living will," complete with plans for how companies would salvage their firm in the event a single unit implodes.

Regulators need to make it much easier to understand financial statements. First, they should impose a strict consolidation of bank balance sheets, forcing them to incorporate all special purpose vehicles.

In addition, more information should be made available about banks' risk-taking. Firms should be compelled to publish monthly indicators drawn up by regulators, including a measure of the relationship between short-term borrowing and long-term lending.

This would enable creditors to exercise proper discipline over the banks by pushing up their borrowing costs if they become too reckless. The notion that only banks themselves can understand their own risk-taking needs to be jettisoned.

Lastly, the government should also reduce the incentives for complexity. Financial institutions mirror the Byzantine structure of regulation, tax and accounting rules. They become complicated in order to shop for the most lenient regulator, lightest capital requirements and most tax efficient structure.

Paring down these rules and structures should be an underlying goal of any regulatory overhaul.

The first step to reducing the magnitude of future mishaps is to ensure that we can make sense of our financial institutions. The respect and awe often accorded to "black box" financial institutions is misplaced and dangerous. Instead we need to embrace simplicity.

The Year Since Lehman -- related columns:

"Living wills" are easier said than done

A year on, it's still a housing story

Swelling deficits and an aging population leave few palatable options when it comes to taxes.

The best choice by far would be the creation of a new value added tax -- a "money machine" that can bring in huge sums with relatively little effort. America is alone among rich nations in not charging a VAT, and its continued unwillingness to do so will make it harder to cope with the fiscal challenges ahead.

Giving birth to a new tax will certainly not be an easy sell. The stunning 1980 reelection defeat of Al Ullman, the powerful chairman of the House Ways and Means Committee who had advocated a VAT, is still a warning to American politicians.

The timing of a new tax on consumption may also seem suspect. Aren't we supposed to be getting Americans back into the malls?

VAT, however, is worth the risk. It could yield enough money to pay for healthcare reform, as well as a meaty cut in income tax and a reduction in the deficit. It could also be done without destroying Obama or the Democrats.

Unlike taxing the rich -- which has emerged as a favorite strategy of many Democrats -- a VAT is extremely easy to collect. This is partly because it is gathered from each producer in a chain.

Take bread. The farmer, miller, baker and grocer all pay their share of the tax. If the grocer cheats, the government loses only a quarter of its tax. Furthermore, each producer has incentive to make sure its suppliers have paid VAT. The miller becomes liable for the farmer's share of VAT unless he can prove the tax has already been paid. VAT collection polices itself to a large extent. The sums of money that could be raised are immense, making it easier to strike a political compromise. Exactly how lucrative VAT would be depends largely on which goods are exempt.

Canada, for example, gives up about a third of potential revenue by excusing food, drugs and transportation from the tax. Even if the United States did the same, a 10 percent tax rate could raise $500 billion a year, according to Eric Toder, an analyst at the Tax Policy Center.

Raise the rate to 15 percent and you get $725 billion. (In comparison, income taxes are expected to yield $968 billion this year.)

This might be hard to square with President Obama's commitment not to raise taxes on anyone making less than $250,000 a year. VAT is a regressive tax -- eating up a larger share of the income of lower wage groups.

This could be offset through the income tax system. In addition, there would be a natural counterbalance if the tax were used to fund an expansion of healthcare. With current health proposals expected to cost around $100 billion a year, there would be plenty of money to spare.

Obama could also borrow a trick from Margaret Thatcher, who used the proceeds from almost doubling VAT to slash British income taxes. A 15 percent VAT would give Obama tremendous leeway to simplify a Byzantine income tax system and to cut rates.

And introducing a VAT need not derail economic recovery. Indeed, if the tax were introduced with a six-month delay it could even provide Americans with an incentive to bring forward spending.

America cannot temporize forever. The aging population will demand both painful spending cuts and tax increases. If the burden is placed on income taxes alone then any increase in rates will be monumental.

When politicians finally confront the looming fiscal crisis, a VAT would be an invaluable tool.

It's been a long, long wait for the shareholders in Cadbury. For a profitless decade since the (adjusted) price first hit six pounds, they have been hoping for someone to come along and take their sweets away on the sort of terms they saw being offered to others.

Now the boys (and girl) from Kraft have decided that putting cheese slices together with Dairy Milk chocolate presents an irresistible opportunity. Cadbury had slimmed down by demerging Dr Pepper, its also-ran US soft drinks business. Investors had heard Todd Stitzer, the chief executive, say he wanted to be a consolidator in FMCG, rather than get eaten, and they had decided that he might be right. There was little in Friday night's price of 568p for a possible takeover.

Swallowing smaller competitors is more fun for the management, but tends to leave the shareholders feeling hungry. When Mars decided to add chewing gum to Snickers, it paid a massive premium for Wrigleys. Bernstein Research, the sector leader, calculates the price at 19.5 times EBITDA, which makes Kraft's $16.7 billion cash and shares offer for Cadbury look several chunks short of a full bar.

A similar multiple would value Cadbury at 10 pounds, which is why the shares shot past the 745p value of the offer this morning. Given Cadbury's scarcity value, and the similar efficiency gains that a break-up offer from Hershey and Nestle could extract, this could turn into a re-run of the epic battle for Rowntrees, the UK's other chocolate maker, in 1988, where the winning offer was twice the pre-bid price.

Yet for all the talk of building "a global powerhouse in snacks, confectionery and quick meals" to rival the reach of Mars/Wrigley, powerhouses do not command high ratings in the stock market. Unilever, for all its valuable brands, currently stands at less than 13 times the latest 12 months' earnings.

Reckitt Benckiser, the kings of domestic cleaning products, are rated higher, at 16 times. That's just more than Diageo, the global powerhouse of the drinks industry, on 16 times, but some way below Associated British Foods, which is hugely successful but hardly an international powerhouse, on 20 times. If Kraft is obliged to pay 10 pounds a share for Cadbury, that would represent 26 times earnings.

Paying up - assuming Kraft can find the money - may make sense for Irene B Rosenfeld and her colleagues in the boardroom, with the opportunities for cost cutting and greater martket reach across the world, but from an investor's viewpoint, it's far better to be eaten than to eat these expensive morsels.