Disillusionment with the inability of the Kabul administration to govern fairly or to significantly reduce violence played a role in the reportedly low turnout at the polls in Helmand.

It is critical that this changes if we are to avoid another Vietnam. The South Vietnamese Army, well trained and equipped, lost heart once the U.S. withdrew, collapsing at the first push, partly because their corrupt and ineffective administration was not worth fighting for.

That an election was held at all in Afghanistan’s most violent province is an achievement. But despite a major operation to drive out the Taliban, the insurgents deterred large numbers of voters. This illustrates just how steep a mountain NATO has to climb. But it does not mean we cannot prevail against them in Helmand.

As President Obama says: "This isn’t a war of choice; it’s a war of necessity." Home grown British terrorists have only demonstrated an ability to kill our people when they have attended serious training and had face-to-face direction from war-hardened jihadists.

The Al Qaida leadership and their camps were driven into Pakistan in 2001. U.S. pursuit across the border using unmanned aerial vehicle strikes has been remarkably effective, resulting directly in the recent reduction of the UK terrorist threat level.

Al Qaida is not just a “global franchise” but also a solid organization that needs places to meet, to plan and to train terrorists. It cannot all be done on the internet.  Substantially unable to function now in Pakistan, the leadership is actively seeking a new base – perhaps in Yemen, Somalia or North Africa. In any of these they would be much more exposed. Their real desire is to return to Afghanistan. NATO forces are preventing that.

But we cannot do it forever. Success equals reducing the insurgency to a level that can be managed by a viable Afghan government backed by a capable security force which can prevent the country becoming a base for attacks on the West including Britain.

How long will this take? The answer to that is how long do we have?  The next U.S. election is at the end of 2012 and the patience of the British electorate will have no greater longevity.

Even as I have defined it, we will not achieve success fully in that time-frame. But we must be very clearly succeeding in a way that we are not now. And certainly in the British forces, we cannot continue with anything like the current rate of casualties over that period.

To counter the Taliban’s present devastatingly effective tactics of mines, roadside bombs and booby traps we need better surveillance and better intelligence, achieved in part through greater active support from the local people. We need to control the night as well as the day. While we build the Afghan army, this can only be done with more of our own troops. A lot more.

Casting aside inter-service rivalries, every sinew of strength of the British armed forces must now go into Afghanistan.  Even that will not be enough.

Prime Minister Gordon Brown must take close personal direction of this war through a war cabinet that will drive every relevant government department to achieve real progress in the short time we have left. And crucially to communicate our war aims to the British people with far greater effect.

LONDON, April 22 (Reuters) - The Treasury is the UK government's finance ministry. There are many other government departments, but in the years since 1997, all have been turned into subsidiaries of the Treasury, the power base of Prime Minister Gordon Brown when he was chancellor.
His ambition was to micro-manage in every one of them. Today we saw the true cost of this disastrous experiment. All major countries have serious problems with their government deficits, but the most entrenched of Britain's are home-made.
Britain's public finances, which had been deteriorating for years, are wrecked. Even on his successor's rose-tinted projections, they will not return to a balanced Budget for at least the next nine years.
Given that no Treasury projection for more than three or four years out bears any resemblance to reality, and given the there will have been at least two elections between now and then, this is a post-dated cheque drawn on the Bank of Fantasy.
Alistair Darling has learned at the feet of the master of obfuscation, double counting and footling detail. So we heard all about the green recovery, from a government that sees no contradiction between raising the cost of fuel and granting tax concessions to North Sea explorers. There may be more oil there, but for the state, this is now a dry well.
The Chancellor did not dare say what he and his advisers really think about the green-tinted scheme wished on them by Peter Mandelson, the Trade Secretary, to scrap your old banger for 2,000 pounds towards a new one.
At least they managed to limit the damage to a single year. If your car is not 10 years old by next March, it will be junked in the ordinary way.
Junk is what the last Treasury forecast has now become. It's barely five months since Darling's last emergency package. It looked like a work of fiction then, and now there's no doubt. In his Budget a year ago, he was expecting to borrow 43 billion pounds in 2008/09, crowing that the previous peak was much higher, at 7.8 percent of gross national product. The sum would come down after that.
By November, there was no crowing. The projected borrowing requirement was 78 billion pounds, and was going up, to 118 billion in the following year, not down. Even those horrible figures have now been left far behind. Last year he needed 90 billion pounds, and in 2009/10, he says, it will be 175 billion pounds, or 12.4 percent of GNP.
The forecast is then for a fall, although not by much. In 2010/11 he - or his successor - will still be 173 billion pounds short of balancing the books.
So in three years the government will have borrowed 5,600 pounds for every man, woman and child in the country. That's over 20,000 pounds for what the prime minister routinely calls the average hard-working family.
In any business, from a corner shop to a multi-national, this arithmetic would be immediately fatal to those who had put it forward. Their credit would be ruined, and the business's credit could not be restored while they were still in charge.
Britain's credit is ultimately expressed in the external value of sterling, as Brown himself has said. The pound has already been devalued informally by a greater amount than the two previous formal devaluations in 1967 and 1992.
The short-term effects have been mostly benign, but the possibility of a flight from the currency is always there. This Budget makes it a little more likely.
In this context, everything else is detail. The biggest detail is the attack on what Darling describes as "those who gained the most". This is a sop to his fractious party in parliament.
From next April anyone earning over 150,000 pounds a year will be paying 51.5 percent on every extra pound earned, the highest rate in Britain for 21 years. They will also lose their tax-free allowances and half the tax relief on their pension contributions.
The small print betrays that the government is relying on these measures to bring in 7 billion a year, sometime in the middle distance. This looks as unconvincing a forecast as any in Darling's portfolio. Well-paid labour is highly mobile nowadays, and will go where the prospects are high and the taxes low.
Nothing else in the 250 pages of the Budget Report is worth a row of green beans. Even the Treasury can't put a price on the measure to reduce VAT on children's car seat bases.
Despite its name, "enhanced capital allowances" will actually raise more money -- 10 million pounds, or enough to run the government machine for about eight minutes.
Thrashing around for something cheerful to say, Darling kept telling us how much worse off other people were. To assert that "we and other countries have been battling against a succession of shocks which have hit the world economy" suggests that our luckless planet had crossed orbits with a large economic meteorite.
The former chancellor, now prime minister, assumed the sun would shine forever, and that he had somehow managed to suspend the usual rules of economics -- or as he himself put it, "no more boom and bust." In recent years, he produced growth by borrowing, pouring the money into the public services for ever-decreasing returns.
Each time he borrowed more than he had forecast. Now the bill has arrived, and it's plain that neither he nor his successor has the slightest idea of what to do. Marc Ostwald of Monument Securities summed it up within minutes: "a Budget of tinkering with the public sector financial sector meltdown, with no substance or obvious strategy whatsoever."
One day the Treasury will remember how to mind its own business, under a chancellor who grasps that until the public finances are put in order, nothing else will go right. The longer the wait, the worse will be the reckoning.

UK Prime Minister Gordon Brown’s call today for a new G20 charter of principles on financial regulation  reflects an emerging consensus among policymakers that, once the immediate crisis has passed, the regulatory framework must be fundamentally redesigned.

In particular, policymakers are concerned with how to correct the basic moral hazard problem in which bankers have an incentive to extend too much credit, while private firms and households have an incentive to take on too much debt.

A consensus is emerging that the volume of credit expansion needs to be restrained and managed as a separate policy objective. This marks a sharp break with past practice — in which central banks attempted to control the cost of credit by manipulating short-term interest rates, but have increasingly left its quantity to decisions by individual banks and borrowers.

There is also something of an emerging agreement that if credit control is a separate economic objective alongside “internal balance” (output-inflation) and “external balance” (trade and capital flows) then a new instrument needs to be developed to achieve this target.

With three targets (internal balance, external balance and financial balance) Tinbergen’s Rule says there need to be three independent policy instruments — fiscal policy, monetary policy, and a distinct credit policy.

In his recent speech to the CBI Annual Dinner in the East Midlands last week, Bank of England Governor Mervyn King alluded to the need to develop a new policy instrument to achieve credit-policy objectives. He stated a strong preference it should not be interest rates. King argued rates should continue to be used to target output and inflation.

The clear implication is the “new policy instrument” referred to by King will have to be some form of direct quantitative control, so as not to interfere with interest-rate strategy, and allow the authorities to manipulate the volume of credit for any given level of interest rates.

SECOND GENERATION CONTROLS
In 1945-1975, banking crises were few, but credit was expensive and unavailable to many households and businesses. The banking system was tightly controlled and the quantity of credit was rationed through a variety of direct mechanisms (reserve requirements, intensive bank examinations, margin requirements and a host of other direct lending controls).

Most of these were dismantled during the 1980s and 1990s. They could be resurrected but this would face stiff opposition from within the industry. It would also face hostility from within the economics establishment (broadly in favour of market solutions) and among politicians (worried about the impact of reduced access to credit for many households, and voters, in the lower half of the income distribution).

Fed Vice-Chairman Don Kohn and Prof Lawrence Summers (now head of the Obama administration’s National Economic Council) both poured scorn on what they saw as a rose-tinted view of the heavy regulatory past at the Fed’s annual Jackson Hole symposium in 2005. Both men are presumably chastened by the subsequent meltdown. But their personal opposition to intensive quantitative controls is probably still intact, and shared by many policymakers at the top of the new administration, in Congress, and among the wider regulatory community.

So the search is on for a compromise. The idea is to create a new instrument or instruments that would work with the grain of the market, rather than cut against it, and enable regulators to exercise some control over the quantity of credit being extended while preserving flexibility for banks to innovate.

If the old pre-1980 quantitative controls are seen as “first generation” methods, the hunt is on for more sophisticated market-friendly “second generation” methods that promote stability while protecting growth.

The first design issue for these new quantitative controls is whether to impose them directly or indirectly.

First-generation quantitative controls were formulated within the central bank and consisted of a series of prescriptive lending ratios.

The trend in recent years has been towards a more indirect approach, in which the central bank and other regulators set out general principles and a flexible framework; banks are then free to manage their business and risk-taking within this. One key question is how far second-generation controls will build on the modern principles-based indirect approach, or revert to a more prescriptive command-and-control one.

COUNTER-CYCLICAL INSTRUMENTS
The second design issue is how to make quantitative controls “active” rather than “passive”. First-generation controls were largely specified in passive terms: fixed capital and lending ratios that were invariant over the cycle. But there is an emerging consensus second-generation controls should be more active and capable of varying over the cycle, limiting credit growth during the expansion phase, but also mitigating the collapse of credit during a contraction.

Contra-cyclical bank regulation policies are especially popular at the moment, because the industry is in the contraction phase, and contra-cyclicality implies a loosening of policy. The real challenge is to create a contra-cyclical approach that is sufficiently robust it can compel the banks to increase their capital cushions during an upturn.

One option is to impose reserve requirements or risk-weightings which rise above the long-term mean during expansions and are allowed to fall below it during the contraction phase. But that raises thorny questions of who measures the cycle and how. Dating and measuring business and credit cycles, and identifying turning points are notoriously difficult in real time.

To take a recent example: the start of the most recent expansion is controversial, with many commentators now arguing the Fed missed the beginning of the upturn and failed to raise interest rates in a timely manner. If the Fed, or another regulator, had been responsible for adjusting reserve requirements or risk-weightings, as well as interest rates, would the adjustments have been any more successful?

If relying on regulators’ discretion to identify turning points in the credit cycle is problematic, is there a way to make contra-cyclical controls endogenous to the lending system?

The aim would be to make reserve requirements, risk-weightings or other instruments depend on the volume of credit extended in the immediate past period(s). Credit controls would be progressively tightened the longer and faster credit expands, and progressively loosened the longer and further credit falls.

The problem with endogenous credit control policies (like endogenous interest rate policies) is that they do not work well around cyclical turning points.  In the summer of 2007, an endogenous contra-cyclical policy would probably still be tightening conditions in response to the explosive credit growth in 2004-H12007 rather than loosening them to forestall the calamitous collapse of credit that occurred later in the year.

INSTITUTIONAL REACH
In practice, credit is hard to define, measure and restrict. Conventional bank lending is only one element of an increasingly complex and diverse credit-creating system.

Finance companies, commodity brokers, special investment vehicles, and even hedge funds, all of which are increasingly active in wholesale money markets, may be engaging in credit-creating processes.

The question of what types of credit to control is analogous to the debate during the 1980s about what measure of the money supply to target. Moreover, Goodhart’s Law suggests any statistical or economic relationship between the chosen target measure and the wider economy will tend to break down once pressure is applied for control purposes.

In fact, as soon as the authorities decide on which forms of credit are subject to regulation and control, there is an immediate incentive to create other forms of credit in other institutions that are not subject to control and therefore more profitable. This was precisely the reason for the huge growth in the “shadow banking system” during the 1990s and 2000s.

To have any chance of being effective, the new credit policy will need to cover the whole range of institutions which create credit, not just commercial banks, and need to be applied on a fairly international basis, to prevent this sort of institutional and jurisdictional arbitrage.

Leaders of the Group of 20 countries meeting in Washington on Nov. 15 are hoping that America’s role in the global financial crisis will shame President George W. Bush, or maybe President-elect Barack Obama, into supporting greater international financial regulation, diminishing America’s role in international financial institutions.

But America is unlikely to give up control over its financial sector, certainly not under Bush, and probably not even under the internationally-popular Obama.

International leaders demand a replay of the 1944 wartime conference at Bretton Woods, New Hampshire, at which delegates from 44 nations created the World Bank and the International Monetary Fund. The World Bank made loans to war-torn countries and now lends to developing countries. The IMF supervised fixed exchange rates centered on the U.S. dollar and gold, a regime abandoned in the 1970s, and made rescue loans to troubled economies, a role that continues.

When European Union leaders met in Brussels on Nov. 7 to prepare for the financial summit, they proposed a course that might be as far-reaching as Bretton Woods.

An EU statement, sweeping but vague, proposed that financial institutions of “systemic importance” be made subject “to rules or at least to oversight wherever they operate” and that “no market segment, no territory, and no financial institution should escape.” That proposition is a dangerously empty vessel into which all manner of regulatory mischief could be poured.

Such international regulation would be unprecedented.

British Prime Minister Gordon Brown and French President Nicholas Sarkozy, now the EU president, want the IMF to enforce the new regime, building up an institution traditionally headed by a European. Standards would be promulgated and enforced by the IMF, similar to the way that the European Commission enforces rules among EU member states.

Their goal is to offer principles for a new international financial system that would be translated into workday regulations for all manner of financial institutions, even ratings agencies. Ambitiously, the Europeans want another summit in 100 days to consider draft regulations.

But it’s unlikely that Congress or any American president, Bush or Obama, would sign on.

Whatever the wisdom of more far-reaching international financial regulations, many Americans don’t want binding rules administered by a bureaucracy unaccountable to the public. They prefer to do the job themselves. They want sovereignty over their own affairs, and are suspicious of international organizations.

Americans’ distrust of international regulation stems from international organizations that are perceived to be anti-American. For example, the United Nations Oil for Food program, intended to allow food to reach hungry Iraqis, wound up profiting Saddam Hussein’s family and political supporters, leaving southern Shiites to starve.

Congress gains power by regulating the financial sector because companies donate campaign funds to members. The securities and investment industry, which stands to lose the most from international regulation, is particularly generous.

The Center for Responsive Politics reports that securities and investment houses donated over $1 million to Senator Chris Dodd, now Senate Banking Committee chairman, and over $540,000 to Alabama Republican Richard Shelby, then-chairman of the Senate Banking Committee, in 2004, the year they last ran for reelection.

Obama received $13 million from the industry for his presidential campaign, and Senator John McCain $8 million.

The fundamental question is whether more international financial regulation can resolve the current crisis and prevent another one– without hindering innovation. Since risk-taking is the engine of economic innovation, we don’t want to stifle it by regulation and all financial innovations will carry some new risks.

The huge crowds that cheered Obama in Europe last summer will not persuade him to cede control over his country’s financial system to the IMF. The most that the G20 can hope for under the new president is that Congress adopts its new principles and America regulates itself.

Diana Furchtgott-Roth can be reached at dfr@hudson.org.

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