–- Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –-

Health reform season kicked off this week with a meeting between President Obama and 24 Senate Democrats at the White House in preparation for congressional hearings and debate on health care in the weeks ahead.

Obama declared: “So we can’t afford to put this off, and the dedicated public servants who are gathered here today understand that and they are ready to get going, and this window between now and the August recess I think is going to be the make-or-break period. ”

At issue is how best to use the $250 billion plus pot of money that could result from taxing the value of employer-provided health insurance. Currently, health insurance provided by the employer to workers is free of income tax. When Senator McCain suggested eliminating tax-free employer-provided health insurance and replacing it with an individual tax credit to be used for health insurance purchases from any company, Obama accused him of raising taxes.

Now, according to Senate Finance Committee Chairman Max Baucus, one of the attendees at the White House meeting, President Obama is open to ending the tax break—without substituting an alternative individual tax credit—in order to finance health care reform. Removal of the tax exclusion would break Obama’s campaign promise not to raise taxes on Americans making less than $250,000 per year.

The tax benefit for employer-provided health insurance has prevented the development of a private health insurance market and tied Americans to their jobs for fear of losing coverage. No one complains that losing a job will mean termination of auto or home insurance, because these policies are purchased independently of employment and numerous companies compete to offer the best deals.

The additional $250 billion a year—as estimated by the nonpartisan Congressional Budget Office—could be a substantial downpayment to the $634 billion that President Obama’s budget sets aside for health care reform.

Democrats want the federal government to use the $250 billion for a national plan to insure the 47 million uninsured. In contrast, Republicans want to use the funds to give each family a refundable tax credit, worth about $2,300 for individuals and about $5,700 for families, with an extra $5,000 for poor families, to purchase health insurance and to expand tax-free health savings accounts.

Coincidentally—or perhaps not—Democrats and Republicans are both proposing to set up “exchanges” as the path to better health care. But there are major differences between the two proposals.

A new Council of Economic Advisers report entitled The Economic Case for Health Reform (view pdf) proposes the creation of an “insurance exchange” to improve the operation of markets for health insurance. This national exchange would coordinate health plan participation; negotiate premiums with employers; disseminate information about different plans; and facilitate enrollment.

During the campaign, President Obama proposed using the insurance exchange in combination with a new public plan. Those Americans who wanted to sign up to the new plan could do so, and private insurance plans would be regulated by the new insurance exchange.

State-based health care exchanges are a crucial feature of the leading Republican health care proposal, “The Patients’ Choice Act of 2009,” (view pdf) proposed by Wisconsin Congressman Paul Ryan and Oklahoma Republican Senator Tom Coburn, a physician who goes home and delivers babies on Mondays. This state exchange would be used as a portal where Americans could take their tax credits and choose private insurance. All insurance plans that are licensed in the state could participate in the state exchange, and premiums would be set by the different companies.

Under Dr. Coburn’s plan, health insurance plans could include high deductible plans combined with health savings accounts, or more traditional managed care or fee for service plans. Those with chronic illnesses, such as hemophilia or diabetes, would be placed in special plans.

Politicians from both parties are open to ending the tax-favored status of employer-provided insurance and putting in place some type of exchange. The question in the months ahead is whether to use the funds for another government health plan and further federal government regulation, or for an individual tax credit encouraging increased consumer choice of plans.

– James Saft is a Reuters columnist. The opinions expressed are his own –

If anyone has reason to pray that the current equity rally holds, it is the world’s active fund managers who need investors to return to the folly of betting on outperforming the markets rather than the uninspiring but reliable business of cutting costs.

Pension funds, particularly those where the employer bears most of the risk of making good on promised payouts, are hurting after more than a decade of poor market returns.

In Britain, for example, pension funds which promise to pay a fixed percentage of workers’ final salaries are woefully underfunded. If you use a more conservative government bond yield to value the funds, the top 200 firms in Britain needed a whopping 120 billion pounds to be considered fully funded, according to consultants Aon Corporation.

This is not the result of some unforeseeable economic storm but instead the fruit of two related delusions; that a prudently managed portfolio can expect to get a return of 8 percent a year or so over the long run, and that individual funds can maximize their returns by choosing the right active fund manager who will outperform even that optimistic benchmark.

And as is so often the case when we are kidding ourselves, these assumptions allowed employers and savers to avoid doing something unpleasant; in this case putting away the cash required to actually fund retirements. Workers felt as if they were “earning” more because their take home pay was larger than it would have been if they were saving sufficiently and businesses could often take contribution holidays or avoid chucking in extra to make good the shortfalls. Win-win, right?

Well, actually no. It was more lose-lose-win, with the two losers being the savers and employers, and the sole winner the financial services industry.

Now it is essentially impossible to know what rate of return capital in aggregate can demand over a long period, but given the way debt goosed the economy and asset markets, and given the way a long, and for investors benign, period of disinflation in the past 25 years affected returns, I’d be willing to bet that the 8 percent benchmark will prove too high.

So that leaves the question of how pension funds and other retirement savers should best invest and on one point there seems little doubt: paying the extra for active fund management is not a good bet.

Active funds create drag on returns in a number of ways; the managers themselves must be paid, as must the investment banks and brokers who advise them and executive the trades they make in order to try to beat the market.

While it is always possible that market returns will more than make up for this, there is no doubt whatever about who bears whatever costs are generated.

LOTS OF DATA, LITTLE OUTPERFORMANCE

Andrew Clare, Keith Cuthbertson and Dirt Nitzsche of London’s Cass Business School have published an analysis of decades of performance data for 734 British pooled pension funds with more than 400 billion pounds under management.

As about 40 percent of UK institutional money is in pooled funds and there is data going back more than 20 years, this is a pretty fair sample.

The result, according to the authors, is that there is “little evidence” of positive performance persistence, i.e. that managers can outperform over time. Further, there is “virtually no evidence” that active fund mangers can time the market.

For example, over a 20 year period ending in 2004, only 3 of 42 pooled funds showed statistically significant outperformance, while 2 showed statistically significant underperformance. All 42 did, however, charge statistically significant fees.

“With increasing numbers of UK fund mangers purporting to be able to provide ‘high alpha’ products to the UK’s beleaguered pensions industry, our results do not give us great confidence that the solution to the widespread deficits lies in the hands of the UK’s active institutional investment managers,” the authors wrote.

About 20 percent of the UK’s institutional money is now in passive strategies, with most of the growth happening in the past 10 years.

The response of the fund management industry to this has been to offer ever more complex fund structures, often with more freedom to short stocks or employ leverage and almost always at a higher cost to the ultimate consumer.

Who knows, perhaps some of these will work. Perhaps all that was wrong with the old fashioned funds was that they couldn’t bet against things, or use borrowed money to amplify returns.

My guess however, is that the best solution is a simple one: go passive and cut fees. It is money in the bank, as it were, from day one.

Employers and employees have a common cause here and should not let an evanescent rally blind them to the steady bleed that fees represent.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

– James Saft is a Reuters columnist. The opinions expressed are his own

Treasury Secretary Geithner is all but admitting that U.S. banks are suffering not from market failure but self-inflicted collateral damage.

The U.S. Treasury on Monday detailed an up to $1 trillion plan to buy up assets from banks in partnership with private investors, using financing bankrolled by the government, financing that is only secured by the value of the doubtful assets the fund buys.

One portion will be dedicated to buying complex securities from banks employing capital contributed by private investors and the government topped up with funds borrowed from the Federal Reserve. A second portion will buy older securities that are, or were, rated AAA, using, you guessed it, more non-recourse funding.

But most interesting of all is a plan to buy whole loans, dubbed “legacy loans”, from banks but this time the private-public subsidized vehicle will get its leverage courtesy of Federal Deposit Insurance Corporation-guaranteed debt.

Notice that the ground has shifted subtly and the government is now talking not just about “toxic” assets but “legacy” ones. A legacy asset is, more or less, everything real estate related now on bank balance sheets.

These loans are not marked to market they are held to maturity, so no blaming the market here. They are nothing more than doubtful loans in the process of going bad as the economy implodes and the real estate they are collateralized with drops in value.

There is an almighty bust in the U.S. real estate market and it is blowing holes in bank balance sheets having nothing to do with securitizations.

It rather undercuts the argument that was advanced about earlier subsidy plans, that there was a “market failure” leading to hard-to-value complex securities being priced by the market at too little, below their fair “held-to-maturity” value.

The only uncertainty around a whole loan is whether the debtor will pay back the loan and, if not, what the collateral is worth. So there is no more deception about liquidity, market failure or anything else, only a naked subsidy to the banking industry, using the private sector as a pricing mechanism and cutting them in on the deal in exchange.

DEFINITION OF PRIVILEGE
So, will it work, and if it does how will this step influence the way banking functions down the road? Depends on what you mean by work, but it will doubtless take a tranche of lousy assets off of banks.

But as for creating confidence, I can’t see it. Firstly, investors will twig to the idea that the balance sheet issues are deep, and secondly, now that we are talking whole loans I think it’s clear that the $1 trillion is only a down payment.

That means the administration will need Congress to play along and fund another wodge of subsidy. That may be a tough sell, especially considering that the administration has bent over backward to keep Congress out of the funding loop, using the Federal Reserve and FDIC as funding mechanisms and thereby effectively arrogating the funding powers Congress is supposed to hold.

The plan also hugely encourages moral hazard, as it leaves too big and too failed companies, boards and executives in place while providing them with a chance to climb out of the holes they have dug themselves. Not much of a lesson in accountability.

Writing in the Wall Street Journal, Secretary Geithner said the U.S. must strike a balance between promoting public trust and spending taxpayer cash to get the banking system functioning.

“This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders,” he wrote.

It is just astounding that he even sees the need to remind us that free government money is not a right, and reveals much about the balance of power between him and those seeking handouts. And you simply can’t give a subsidy without enriching executives or shareholders, you can only hope not to do it too obviously.

Finally, don’t even begin to believe that concerns about government interference will leave the U.S. with few well qualified asset managers willing to commit their capital to the plan. New York and Connecticut are stuffed to the gills with asset managers who would crawl naked over hot coals to get access to cheap, non-recourse, long-term funding from the government.

That there are suggestions to the contrary is simply an attempt to try and influence the debate about government control over compensation at firms which accept taxpayer largess. A smokescreen within a smokescreen.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –

– Kristin Lord is a fellow at the Brookings Institution and author of the recent report, “Voices of America: U.S. Public Diplomacy for the 21st Century.” The views expressed are her own. –

As Senate confirmation hearings approach, America’s next public diplomacy leaders will get abundant advice about how to improve America’s standing in the world. The Obama administration’s nominees (an under secretary and at least two assistant secretaries in the State Department alone) would be wise to listen.

Yet, in truth, America’s new public diplomacy team can accomplish much by following that age old maxim: first, do no harm.  Seven key “don’ts” are worth bearing in mind.

1) Don’t let the pollsters get you down. Being liked and admired, while useful, should not be the sole metric of success in public diplomacy. The job of American public diplomacy leaders is to promote American national interests through the power of communication, build mutual trust and understanding, strengthen support for universal values Americans share, and build enduring relationships with current and future opinion leaders around the world. Measuring achievement through poll numbers encourages short-term thinking and can jeopardize long-term success.

2) Don’t forget the borders. More than 50 million foreign travelers spend their own money to visit the United States each year, a number that vastly exceeds the number of participants in U.S. government funded exchange programs. Talk of re-booting America’s image in the world will fall flat if those visitors feel badly treated at U.S. borders and consulates.

3) Don’t forget the Pentagon. The State Department controls just a fraction of the U.S. government’s personnel and budget for public diplomacy and strategic communication.  To have impact, the State Department’s public diplomacy leaders should engage the Defense Department and the rest of the U.S. government early on.

4) Don’t go it alone. As the State Department’s new director of policy planning wrote in a recent “Foreign Affairs” article, in today’s world the “measure of power is connectedness,” a fact that should give the United States tremendous advantages.  But to fully embrace the power of networks, the U.S. government must find new ways to mobilize private actors it does not control, support and call attention to the good work of others without taking credit, and (when it advances important American objectives) empower credible voices to speak out even if they fall out of step with official U.S. policies.

5) Don’t forget old standards. New leaders typically want to put their own mark on an institution.  Since U.S. public diplomacy needs fresh perspectives, this is desirable as well as understandable.  Nonetheless, enthusiasm for signature programs and whiz-bang technologies should not be allowed to overshadow the tried and true workhorses of public diplomacy: educational and professional exchanges, visitor programs, and personal outreach by diplomats in the field.

6) Don’t trust your gut. As a former senior official once remarked to me, “we cannot remind ourselves often enough that the rest of the world is not just like us.” Even the most savvy, knowledgeable, and experienced public diplomats can hit off-key notes or design poor public diplomacy programs by forgetting this simple rule.  Public diplomacy leaders must resist the urge for speed and remember to both listen and test new ideas against foreign ears.  They will sometimes be surprised at what they learn – and save themselves a world of trouble.

7)   Don’t forget friends. During the Cold War, the United States devoted substantial public diplomacy resources to winning and maintaining allies in Europe, Asia, Latin America, and Africa.  As we again (quite reasonably) worry about enemies, that lesson is worth remembering.  The United States faces a host of complex transnational challenges ranging from financial crises to narcotics trafficking, climate change to terrorism, and we will need all the help we can get to confront them.

In a world where two-thirds of the world’s nations are democracies and citizens worldwide have unprecedented access to information, the United States must engage foreign publics, not just their governments, if it wishes to garner foreign support.

Public diplomacy is a tough business.  Success usually goes unnoticed, but failures can resound globally.  Avoiding missteps is impossible but avoiding these seven mistakes will give America’s next public diplomacy leaders a useful head start.

Could it be that the gas dispute between Moscow and Kiev broke out because Russian Prime Minister Vladimir Putin felt personally slighted by his Ukrainian opposite number, Yulia Tymoshenko?
It may seem far-fetched that two countries would risk leaving half of Europe without gas over something so apparently petty. But a look at the sequence of events that led up to this crisis suggests there just might be something in it.

Rewind back to Oct. 2, and Tymoshenko is meeting Putin at his Novo-Ogaryovo residence outside Moscow. It is a lodge in forested parkland where, as a rule, he only invites people on whom he wants to make a good impression.

The portents were not good. Tymoshenko, often called the "Gas Princess" for the gas business she used to run in eastern Ukraine, has been a driving force behind Kiev’s push to integrate with the West and once wrote an article in a U.S. journal saying Russia had “imperial designs” on its neighbours.

Yet Putin and Tymoshenko seemed to hit it off. The Ukrainian Prime Minister, dressed in a designer outfit and looking much younger than her 47 years (she has since turned 48), radiated charm as she sat opposite her Russian colleague. Putin, the gruff former KGB spy, smiled and cracked jokes at a press briefing with Tymoshenko afterwards. And later that same evening, Putin took Tymoshenko to Gorki, where his boss Dmitry Medvedev has his own out-of-town residence, and they talked late into the night.

Most importantly, the visit ended with a deal on gas: Russia said it would not charge Ukraine market prices for gas straight away, and they agreed a memorandum which would serve as the basis for a new gas contract for 2009.

Now fast forward to December last year and – at least from the Russian perspective – Tymoshenko was going back on her word. The Russian theory goes that Tymoshenko, watching world prices for oil plummet and knowing that gas prices would eventually follow suit, decided that Ukraine should pay less for its gas than she had agreed back in October at Novo-Ogaryovo.

It should be noted that neither side ever made public what was agreed in October so it is impossible to judge if anyone has welched on the deal, and in fact Ukraine says it is Russia that is now failing to honour that agreement.

Either way, the indications from Russian officials are that Putin felt Tymoshenko had betrayed him, and was angry about it. Angry enough to start a gas war? It was probably not the only reason. It is impossible to dismiss the fact that there is a business dispute at play here. And then there is Russia’s well-known dislike for Ukraine’s pro-Western policies. But the theory is at least worth adding to the mix. We already know Putin is a man who takes politics personally. He did, after all, threaten to hang Georgian President Mikheil Saakashvili up by his genitals.

In the big battle scene in the movie Braveheart, terrified whispers ran up and down the ragged ranks of sword-waving Scots that the English were ranged before them with “500 heavy horse” – armoured cavalry of devastating power in those days.

But the wild-haired hero-general William Wallace (actor-director Mel Gibson) rode his pony up and down the front ranks shouting: “We don’t have to beat them. We just have to fight them!”

That was in the 14th century. But 700 years later it seems to be the same cry  from the Gaza Strip, where Palestinian fighters allied to the Islamic fundamentalist cause led by Hamas pursue a lopsided battle against Israel, pitching erratic, homemade rockets into nearby Israeli lands, until they trigger a major offensive and start taking the heaviest casualties in 60 years of conflict, from Israel F-16s and Apache helicopters.

The warplane is today’s ‘heavy horse’, of course, but it can represent a far, far superior advantage. The Israelis fly with virtual impunity over the crowded Gaza enclave, picking out designated targets in their own good time, capable of selecting individual apartments in a block if they need to. Should it come to ground fighting, Israel has equally advanced tanks with state-of-the-art optics and sensors, plus plenty of modern armoured personnel carriers and artillery that the Islamists do not possess.

The score in Gaza, to state the facts in the crudest terms, was 300 to 1 dead in the first 48 hours.

Monday was day three of the air campaign. In 1999 NATO found itself in its first war, against Serbia over the conflict in Kosovo. The air campaign was conducted at the safety altitude of 22,000 feet because the Serbs, unlike Hamas, did indeed possess anti-aircraft missiles and cannon. A committee of 19 states, the 45-year-old alliance was a nervous newcomer to actual fighting. It gambled that air power would inflict just enough pain to persuade the Serbs to capitulate. But when that did not happen in the first five days, NATO was in a panic, and facing the unthinkable – an invasion.

Some generals had warned the allies that, if you start a war, you must be ready to go all the way and ‘put boots on the ground’. But they had preferred wishful thinking.

Israel, of course, is no newcomer to war, does not need lessons in the limits of air power, and knows that a ground offensive in Gaza cannot be ruled out. Even if Gaza’s Islamist militants number 35,000 as estimates say, there is little doubt who would be likely to come out on top. But it would probably be on top of a land of rubble, with a storm of Arab and Muslim defiance gathering above the entire region.

As the smoke rises from Gaza, anger and defiance seems to be spreading across the Arab world, fuelling protests and violence in the occupied West Bank, stoking anti-Israel sentiment in the wider Arab world, where the young, especially, despise seemingly weak, or complacent regimes unwilling or unable to do something. Islam is their “rock n roll” now, as one writer recently put it, and the militants of Islam have no moral problem with “asymmetric warfare” -- the return of the suicide bomber to Israeli cities, the weapon no Apache or F-16 can stop.

If this is what the defiance of Gaza’s puny rockets begets, then Braveheart’s romantic injunction that “you just have to fight them” could prove to be correct.

(Smoke rises after an Israeli air strike in the northern Gaza Strip December 28, 2008. Israel launched air strikes on Gaza for a second day on Sunday, piling pressure on Hamas after killing more than 270 people in one of the bloodiest days in 60 years of conflict between the Palestinians and the Jewish state. REUTERS/Baz Ratner)

Fifteen years ago this month, Guinea’s late ruler Lansana Conte made clear what form democracy would take under his rule.

We answered a summons to a late night news conference to hear the result of his first multiparty election, speeding through silent streets where armoured vehicles waited in the shadows. The interior minister announced that ballots from the east, the opposition’s stronghold, had been cancelled because of irregularities. Conte had therefore won 50.93 percent of the vote. There was no need for a run-off because he had an absolute majority.

The show was over.

We rushed off to file our stories at the press centre, set up helpfully by a government under pressure to show the world it was ready for fair elections. The press centre was gone, the lines cut. In the morning, fighter jets swept over Conakry in case the message had not been clear already.

There were more elections, there was occasional turmoil on the streets, sometimes bloodshed. At one point Conte was almost overthrown, but he managed to hold on until his death from illness on Monday.

In a matter of hours, the army - Conte’s real constituency – made clear he would be succeeded by one of his own instead of any of the civilian politicians who prospered under the system over which he kept such strong control.

Captain Moussa Dadis Camara, the head of the junta, was the first soldier to announce the coup on state radio. A Guinean website said the choice was made by drawing lots. Camara's promises - heard many before times in Africa - are to fight corruption, to hold elections in a set period – in this case two years - and not to stand himself.

Thousands of Guineans have come out to cheer, hoping for a clean break from the Conte era. But thousands once cheered Conte as a reformer. His 1984 coup followed the death of Sekou Toure, the independence era leader who became paranoid, cruel and isolated during more than a quarter century in power.

It is interesting to compare Guinea and Ghana, the first former European colonies in West Africa to win independence - Ghana in 1957 and Guinea in 1958.

In recent years, Ghana seems to have escaped its own cycle of coups and counter coups that brought ruin for decades. On Sunday, it will hold a presidential election run-off after a first round that set an example to the continent. The two candidates both appear to have a genuine chance of winning. Investment has been flowing in and living standards have, overall, been rising.

Look at the World Bank data and the winner is very clear. In the decade between 1997 and 2007, Guinea’s per capita income, in current U.S. dollars, dropped from $500 to $400. Ghana’s has risen from $370 to $590.

Will Guinea have a better chance of success this time? Is Western-style democracy appropriate in a country carved up by colonialists across ethnic lines? Is there a better alternative?

What should the world do? Western countries were never particularly vocal about Conte’s version of democracy. Will they be as critical of the junta as they have been of Zimbabwe’s President Robert Mugabe, or do different standards apply?

– James Saft is a Reuters columnist. The opinions expressed are his own –

The Citigroup bailout is sure to succeed, but only if you count avoiding making unpleasant but needed decisions as success.

It won’t work if you define success as building confidence and attracting private capital back to the banking system. It fails to work out a clearing price for rotten assets, and though it underwrites $306 billion of them even this huge sum is not enough to suspend disbelief.

It won’t even work if you define success as jump starting Citibank lending to private borrowers. The bankers have every reason to keep their heads down and pray they can slowly rebuild capital rather than lending into the biggest downturn in two or three generations.

At best it buys Citibank some time, though heaven knows what they can do in the next little while to stave off a cascade of writedowns in their housing and consumer loan books, much less their emerging market businesses.

It also, and I think tellingly, avoids taking a credible decision on whether Citigroup, and by extension the U.S. banking industry, can avoid explicit as well as effective nationalization.

We are in a really dangerous moment when is it apparent not only that no one really knows what to do, but that the people making decisions now are not the ones who will be left to sort them out once a new administration takes power in Washington. That provides a ready excuse to simply kick Citigroup’s can along the road.

One thing is very clear; the terms extended to Citigroup were a lot less difficult to bear than other earlier bailouts. I would guess that this is because the government is terrified that they have become the only game in town. The government is in a double bind; they must extend capital to banks or see them fail but every time they do it they make the banks less attractive to private money.

Any more radical solution would be difficult for a lame duck administration to attempt, and given the size of the banks involved, very daunting.

The United States will invest $20 billion in Citi preferred shares which will pay an 8 percent dividend.
The government will get 10-year warrants to buy $2.7 billion of common stock at $10.61 per share, as against Citi’s $3.77 price just before the deal was announced.

The government will guarantee $306 billion of Citi assets, with Citi taking the first $29 billion in pre-tax losses and the government on the hook for 90 percent of the losses after that. These assets will remain on Citi’s balance sheet and it will continue to get any income they generate but Citi will issue $7 billion of preferred stock, which will also pay 8 percent, as a fee. These assets will only be 20 percent risk weighted, which will free up an estimated $16 billion of capital. All in all, it was enough to underwrite a more than 70 percent rally in Citigroup shares.

Crucially, we’ve not yet seen any indication that we will get a full accounting of exactly how that $306 billion was valued, other than it was agreed between Citi and the United States. It is another example of the U.S. saying: “Don’t worry,  we will make it all OK,” without exactly specifying what “it” is.

CIRCLE OF CYNICISM

And of course without being able to see what the assets will actually fetch, especially in a declining economic environment, who would want to buy the pig in the bank’s poke?

That being the case, and in the firm expectation that loan losses will mount as the economy worsens, it’s a fair bet that the vicious cycle of writedowns and capital need will continue. In the absence of some real clearing mechanism for banking assets, and a willingness for government to pick up the pieces for those banks that can’t survive, expect more requests for life support from more banks.

But governments are finding it increasingly frustrating, at least publicly, that they pour money into banks yet see little in the way of lending come out the other end.

“The heart of the fear for all of us that still value free markets is that governments will eventually decide to nationalize whole swathes of the global banking system to ensure that the money they’ve invested in the recapitalization trade filters through into the wider economy,” Deutsche Bank credit strategist Jim Reid wrote in a note to clients.

“Ironically there may be a time when banks have to decide whether they need to make loans that may prove to be loss-making just to avoid governments losing patience and nationalising them.”
It is really a worst of all worlds, a circle of cynicism; governments prop up the good and the bad in the banking system, which in turn makes loans it doesn’t really think make any sense.

It’s a heck of a way to allocate capital, and almost as bad as the old system.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

The price of oil may have dropped by more than half in recent weeks but the Saudi petrodollar appears to have lost none of its allure, judging by the procession of very important visitors to the New York Palace Hotel this week and to the U.N. General Assembly. With President George W. Bush in the lead, they have all come to present their compliments to King Abdullah, the Saudi ruler, who has turned the Manhattan hotel and the world body into an extension of his court, complete, it would seem, with a Majlis to receive petitioners.

Naturally, all the VIPs visiting him are eager to congratulate his majesty on his interfaith initiative, a gathering of religious and political leaders which took place  this week under the auspices of the United Nations. The meeting has attracted extravagant praise from, among others, Tony Blair, the former British Prime Minister,  and Shimon Peres,  the veteran Israeli president.

It is a fact that the king's initiative is unprecedented and bold, taking place despite the displeasure of many influential religious clerics at home. It is also a fact that he is the first Saudi leader to have travelled to the Vatican, opening dialogue between the two largest religions.

But some commentators have pointed out the oddity that the king, who at home shares power with clerics of the puritanical Wahhabi Islam -- which forbids any expression of other religious belief inside the kingdom, even of less austere forms of Muslim belief -- should be so keen on interfaith dialogue abroad. Even Mr Blair admits coyly, in a newspaper article to coincide with the conference, that the king is also "the leader of a nation that critics say has been slow to modernise, with fraught consequences for the rest of the world".

Critics also point out that the 15 Saudi hijackers who were among the 19 young Arab men who carried out the Sept 11, 2001 attacks against the Twin Towers and the Pentagon in the United States were partly influenced by the Wahhabi ideology.

But amid the financial turmoil sweeping international markets, the galaxy of world leaders chose to set aside their misgivings about Saudi Arabia's domestic policies and freedom record. In their sight, they had one goal:

They are hoping Saudis will stump up cash to help the International Monetary Fund bail out emerging and developed countries in crisis.

Diplomats at the United Nations uncomfortably (and privately) acknowledge that Saudi Arabia's wealth and its growing importance as a major contributor to the U.N. aid programmes -- it recently gave $500 million to the World Food Programme -- were behind the high turnout at the forum and lack of criticism of Saudi domestic policies.