Monthly Archives: January 2014

“Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law.” Nobel Laureate F.A. Hayek, “The Road to Serfdom”

“If, however, the law is to enable authorities to direct economic life, it must give them powers to make and enforce decisions in circumstances which cannot be foreseen and on principles which cannot be stated in generic form. The consequence is that, as planning extends, the delegation of legislative powers to diverse boards and authorities becomes increasingly common…Constantly the broadest powers are conferred on new authorities which, without being bound by fixed rules, have almost unlimited discretion in regulating this or that activity of the people.”, F.A. Hayek

Comment by Mike Perry, former Chairman and CEO, IndyMac Bank:

“Hayek is one of the great economic and political thinkers in history. Chapter Six of his famous book (written in the 1930’s), “The Road to Serfdom”, entitled “Planning and the Rule of Law” really hit home for me given my experiences of the past five plus years. It’s hard to believe that even today, I am still embroiled in civil litigation related to IndyMac Bank’s failure during the financial crisis. I didn’t do anything wrong (and not a single allegation against me was ever proven). I ran IndyMac to the very best of my abilities (and I am pretty able) and always followed the laws and regulations. I remain proud to this day of my decisions and actions during the financial crisis. Despite those facts, I and my family have experienced firsthand the unfairness and arbitrariness of our civil laws and dysfunction of our legal system. Hayek uses the term “coercive powers of government” throughout this book. (He is really talking about the fact that all governments have power over the individual.) Like most Americans, until my recent years’ legal experiences, I would never have thought of our government in this manner. However, I experienced firsthand the unfair, arbitrary and unchecked powers of government bureaucracies like the SEC and FDIC. It seems to me that our government and legal system in the U.S. is moving away from The Rule of Law and becoming more arbitrary by the day. I am concerned for our Country, because as Hayek argues below, abandonment of The Rule of Law leads to a totalitarian government.”

Excerpts from Nobel Laureate F.A. Hayek’s, “The Road to Serfdom: Chapter Six, Planning And The Rule of Law”:

“Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law. Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand….rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”

“..the essential point, that discretion left to the executive organs wielding coercive power should be reduced as much as possible, is clear enough. While every law restricts individual freedom to some extent by altering the means which people may use in pursuit of their aims, under the Rule of Law the government is prevented from stultifying individual efforts by ad hoc action. Within the rules of the game the individual is free to pursue personal ends and desires, certain that the powers of government will not be used to deliberately frustrate them.”

“The distinction we have drawn before between the creation of a permanent framework of laws within which the productive activity is guided by individual decisions and the direction of economic activity by a central authority is thus really a particular case of the more general distinction between the Rule of Law and arbitrary government.”

“Under the first the government confines itself to fixing rules determining the conditions under which the available resources may be used, leaving to the individuals the decision for what ends they are to be used. Under the second the government directs the use of the means of production to a particular end.”

“The first type of rules can be made in advance, in the shape of formal rules which do not aim at the wants and needs of particular people. They are intended to be merely instrumental in the pursuit of people’s various individual ends. And they are, our ought to be, intended for such long periods that it is impossible to know whether they will assist particular people more than others. They could almost be described as a kind of instrument of production, helping people predict the behavior of those with who they must collaborate, rather than as efforts toward the satisfaction of particular needs.

“Economic planning of the collectivist kind necessarily involve the very opposite of this. The planning authority cannot confine itself to providing opportunities for unknown people to make whatever use of them they like. It cannot tie itself down in advance to general and formal rules which prevent arbitrariness. It must provide for the actual needs of people as they arise and then deliberately choose between them. It must constantly decide questions which cannot be answered by formal principles only, and in making these decisions, it must set up distinctions of merit between the needs of different people. When the government has to decide how many pigs are to be raised or how many buses are to be run, which coal mines are to operate, or at what prices shoes are to be sold, these decisions cannot be deduced from formal principles or settled for long periods in advance. They depend inevitably on the circumstances of the moment, and in making such decisions, it will always be necessary to balance one against the other in the interests of various persons and groups. In the end, somebody’s views will have to decide whose interests are more important; and those views must become part of the law of the land, a new distinction of rank which the coercive apparatus of government imposes on people.”

“The distinction we have just used between formal law or justice and substantive rules is very important and at the same time most difficult to draw precisely in practice. Yet the general principle involved is simple enough. The difference between the two kinds of rules is the same as that between laying down a Rule of the Road, as in a Highway Code, and ordering people where to go; or, better still providing signposts and commanding people which road to take.”

“The formal rules tell people in advance what action the state will take in certain types of situation, defined in general terms, without reference to time and place or particular people….The knowledge that in such situations the state will act in a definite way, or require people to behave in a certain manner, is provided as a means for people to use in making their own plans…..They do not involve a choice between particular ends or particular people, because we just cannot know beforehand by whom and it what way they will be used.”

“In our age, with its passion for conscious control of everything, it may appear paradoxical to claim as a virtue that under one system we shall know less about the particular effect of the measures the state takes than would be true under most other systems and that a method of social control should be deemed superior because of our ignorance of its precise results. Yet this consideration is in fact the rationale of the great liberal principle of the Rule of Law.”

“If individuals are to be able to use their knowledge effectively in making plans, they must be able to predict actions of the state, which may affect these plans. But if the actions of the state are to be predictable, they must be determined by rules fixed independently of the concrete circumstances which can neither be foreseen nor taken into account beforehand: and the particular effects of such actions will be unpredictable.”

“If, on the other hand, the state were to direct the individual’s actions so as to achieve particular ends, its actions would have to be decided on the basis of the full circumstances of the moment and would therefore be unpredictable. Hence the familiar fact that the more the state “plans”, the more difficult planning becomes to the individual.”

“Wherever the state can exactly foresee the effects (of laws it makes) on particular people of alternative courses of action, it is also the state which chooses between different ends. If we want to create new opportunities open to all, to offer the chances of which people can make what use they like, the precise results cannot be foreseen. General rules, genuine laws as distinguished from specific orders, must therefore be intended to operate in circumstances which cannot be foreseen in detail, and, therefore, their effect on particular ends or particular people cannot be known beforehand. It is in this sense alone that it is at all possible for the legislator to be impartial.”

“As soon as the particular effects are foreseen at the time a law is made, it ceases to be a mere instrument to be used by the people and becomes instead an instrument used by the lawgiver upon the people and for his ends. The state ceases to be a piece of utilitarian machinery intended to help individuals in the fullest development of their individual personality and becomes a “moral” institution….where “moral” is not used in contrast to immoral but describes and institution which imposes on its members its views on all moral questions, whether these be moral or highly immoral. In this sense the Nazi or any other collectivist state is “moral”, while the liberal state is not.”

“Perhaps it will be said that all this raises no serious problem because in the kind of questions which the economic planner would have to decide he need not and should not be guided by individual prejudices but could rely on the general conviction of what is fair and reasonable. This contention usually receives support from those who have experience planning in a particular industry and who find that there is no insuperable difficulty about arriving at a decision which all those immediately interested will accept as fair.”

“The reason why this experience proves nothing is, of course, the selection of the “interests” concerned when planning is confined to a particular industry. Those most immediately interested in a particular issue are not necessarily the best judges of the interests of society as a whole. To take only the most characteristic case: when capital and labor in an industry agree on some policy of restriction and thus exploit the consumers, there is usually no difficulty about the division of the spoils in proportion to former earnings or on some similar principle. The loss which is divided between thousands or millions is usually either simply disregarded or quite inadequately considered.”

“If we want to test the usefulness of the principle of “fairness” in deciding the kind of issues which arise in economic planning, we must apply it to some questions where the gains and the losses are seen equally clearly. In such instances it is readily recognized that no general principle such as fairness can provide an answer.”

“When we have to choose between higher wages for nurses and doctors and more extensive services for the sick, more milk for children and better wages for agricultural workers, or between employment for the unemployed or better wages for those already employed, nothing short of a complete system of values in which every want of every person or group has a definite place is necessary to provide an answer.”

“In fact, as planning become more and more extensive, it becomes regularly necessary to qualify legal provisions increasingly by reference to what is “fair” or “reasonable”; this means that it become necessary to leave the decision of the concrete case more and more to the discretion of the judge or authority in question.”

“One could write a history of the decline of the Rule of Law….in terms of the progressive introduction of these vague formulas into legislation and jurisdiction, and of the increasing arbitrariness and uncertainty of, and consequent disrespect for, the law and the judicature, which in these circumstances could not but become an instrument of policy.”

“It is important to point out once more in this connection that this process of decline in the Rule of Law has been going on steadily in Germany for some time before Hitler came into power and that a policy well advanced toward totalitarian planning had already done a great deal of the work which Hitler completed.”

“There can be no doubt that planning necessarily involves deliberate discrimination between particular needs of different people, and allowing one man to do what another must be prevented from doing. It must lay down by a legal rule how well off particular people shall be and what different people are to be allowed to have and do. It means in effect a return to the rule of status…”

“Indeed, the Rule of Law, more than the rule of contract, should probably regarded as the true opposite of status. It is the Rule of Law, in the sense of the rule of formal law, the absence of legal privileges of particular people designated by authority, which safeguards that equality before the law which is the opposite of arbitrary government.”

“A necessary, and only apparently paradoxical, result of this is that formal equality before the law is in conflict, and in fact incompatible, with any activity of the government deliberately aiming at material or substantive equality of different people, and that any policy aiming directly at a substantive ideal of distributive justice must lead to the destruction of the Rule of Law. To produce the same result for different people, it is necessary to treat them differently.”

“To give different people the same objective opportunities is not to give them the same subjective chance. It cannot be denied that the Rule of Law produces economic inequality….all that can be claimed for it is that this inequality is not designed to affect particular people in a particular way.”

“It is very significant and characteristic that socialists (and Nazis) have always protested against “merely” formal justice, that they have always objected to a law which had no views on how well off particular people ought to be, and that they have always demanded a “socialization of the laws,” attacked the independence of judges, and at the same time given their support to all movements which undermined the Rule of Law.”

“The conflicts between formal justice and formal equality before the law, on the one hand, and the attempts to realize various ideals of substantive justice and equality, on the other, also accounts for the widespread confusion about the concept of “privilege” and its consequent abuse. To mention only the most important instance of this abuse….the application of “privilege” to property as such. It would indeed be a privilege if, for example, as has sometimes been the case in the past, landed property were reserved to members of nobility. And it is a privilege if, as is true in our time, the right to produce or sell particular things is reserved to particular people designated by the authority. But to call private property as such, which all can acquire under the same rules, a privilege, because only some succeed in acquiring it, is depriving the word “privilege” of its meaning.”

“The unpredictability of the particular effects, which is the distinguishing characteristic of formal laws of a liberal system, is also important because it helps us to clear up another confusion about the nature of this system: the belief that its characteristic attitude is inaction by the state.”

“Of course, every state must act and every action of the state interferes with something or other. But that is not the point. The important question is whether the individual can foresee the action of the state and make use of this knowledge as a datum in forming his own plans, with the result that the state cannot control the use made of its machinery and that the individual knows precisely how far he will be protected against interference from others, or whether the state is in a position to frustrate individual efforts. The state controlling weights and measures (or preventing fraud or deception in any other way) is certainly acting, while the state permitting violence, for example, by strike pickets, is inactive. Yet it is in the first case the state observes the liberal principles and in the second it does not.”

“The Rule of Law was consciously evolved only during the liberal age and is one of its greatest achievements, not only as a safeguard but as the legal embodiment of freedom. As Immanuel Kant put it (and Voltaire expressed it before him in very much the same terms), “Man is free if needs to obey no person but solely the laws”.”

“As a vague ideal it has, however, existed at least since Roman times, and during the last few centuries it has never been so seriously threatened as it is today. The idea that there is no limit to the powers of the legislator is in part a result of popular sovereignty and democratic government. It has been strengthened by the belief that, so long as all actions of the state are duly authorized by legislation, the Rule of Law will be preserved. But this is completely to misconceive the meaning of the Rule of Law. This rule has little to do with the question whether all actions of government are legal in the juridical sense. They may well be and yet not conform to the Rule of Law.”

“The fact that someone has the full legal authority to act in the way he does gives no answer to the question where the law gives him power to act arbitrarily or whether the law prescribes unequivocally how he has to act.”

“It may well be that Hitler has obtained his unlimited powers in a strictly constitutional manner and that whatever he does is therefore legal in the juridical sense. But who would suggest for that reason that the Rule of Law still prevails in Germany.”

“To say that in a planned society the Rule of Law cannot hold is, therefore, not to say that the actions of the government will not be legal or that such a society will be necessarily lawless. It means only that the use of the government’s coercive powers will no longer be limited and determined by pre-established rules.”

“The law can, and to make a central direction of economic activity possible must, legalize what to all intents and purposes remains arbitrary action. If the law says that such a board or authority may do what it pleases, anything that board or authority does is legal…but its actions are certainly not subject to the Rule of Law. By giving the government unlimited powers, the most arbitrary rule can be made legal; and in this way democracy may set up the most complete despotism imaginable.”

“If, however, the law is to enable authorities to direct economic life, it must give them powers to make and enforce decisions in circumstances which cannot be foreseen and on principles which cannot be stated in generic form. The consequence is that, as planning extends, the delegation of legislative powers to diverse boards and authorities becomes increasingly common….Constantly the broadest powers are conferred on new authorities which, without being bound by fixed rules, have almost unlimited discretion in regulating this or that activity of the people.”

“The Rule of Law thus implies limits to the scope of legislation: it restricts it to the kind of general rules known as formal law and excludes legislation either directly aimed at particular people or at enabling anybody to use the coercive power of the state for the purpose of such discrimination. It means, not that everything is regulated by law, but, on the contrary, that the coercive power of the state can be used only in cases defined in advance by the law and in such a way that it can be foreseen how it will be used. A particular enactment can thus infringe on the Rule of Law. Anyone ready to deny this would have to contend that whether the Rule of Law prevails today in Germany, Italy, or Russia depends on whether the dictators have obtained their absolute power by constitutional means.”

“Whether, as in some countries, the main applications of the Rule of Law are laid down in a bill of rights or in a constitutional code, or whether the principle is merely a firmly established tradition, matters comparatively little. But it will readily be seen that, whatever form it takes, any such recognized limitations of the powers of legislation imply the recognition of the inalienable right of the individual, inviolable rights of man.”

“In this respect much more consistency is shown by the numerous reformers who, ever since the beginning of the socialist movement, have attacked the “metaphysical” idea of individual rights and insisted that in a rationally organized world there will be no individual rights but only individual duties. This indeed, has become the much more common attitude of so-called “progressives”, and few things are more certain to expose one to the reproach of being a reactionary than if one protests against a measure on the grounds that is a violation of the rights of the individual. Even a liberal paper like the Economist was a few years ago holding up to us the example of the French, of all people, who had learned the lesson that “democratic government no less than dictatorship must always have plenary powers in posse, without sacrificing their democratic and representative character. There is no restrictive penumbra of individual rights that can never be touched by government in administrative matters whatever the circumstances. There is no limit to the power of ruling which can and should be taken by a government freely chosen by the people and can be fully and openly criticised by an opposition.””

“This may be inevitable in wartime, when, of course, even free and open criticism is necessarily restricted. But the “always” in the statement quoted does not suggest that the Economist regards it as a regrettable wartime necessity. Yet as a permanent institution this view is certainly incompatible with the preservation of the Rule of Law and it leads straight to the totalitarian state. It is, however, the view which all of those who want the government to direct economic life must hold.”

“How even a formal recognition of individual rights, or of the equal rights of minorities, loses all significance in a state that embarks on a complete control of economic life, has been amply demonstrated by the experience of the various Central European countries. It has been shown possible to pursue a policy of ruthless discrimination against national minorities by the use of recognized instruments of economic policy without ever infringing the letter of statutory protection of minority rights. This oppression by means of economic policy was greatly facilitated by the fact that particular industries or activities were largely in the hands of a national minority, so that many a measure aimed ostensibly against an industry or class was in fact aimed at a national minority. But the almost boundless possibilities for a policy of discrimination and oppression provided by such apparently innocuous principles as “government control of the development of industries” have been amply demonstrated to all those desirous of seeing how the political consequences of planning appear in practice.”

“Central banks cannot simply move economic growth and employment to a desired level. Monetary policy (cannot) replace a sustainable growth policy, a well-balanced fiscal policy, a well functioning labour market, or an open world trade regime. It is important to avoid illusions in this respect. Monetary policy cannot assume responsibility for everything.”, Thomas Jordon Chairman, Swiss National Bank

“I encourage you to read the Swiss National Bank Chairman’s January 16, 2014 speech: “A new role for central banks?” or its summary (or the excerpts I have highlighted) below. Then read incoming Fed Chairwoman Janet Yellen’s January 20, 2014, Time magazine profile or read my blog posting Statement #111. After reading Chairman Jordan’s speech, I think the Swiss Central Bank provides an outstanding example of a realistic and prudent central bank. In direct contrast to the Federal Reserve. (In fact, if you read the speech carefully, Chairman Jordon takes several jabs at the Fed’s policies, without mentioning them by name.) I don’t think it’s the Fed Chair or the Fed Governors who are the primary problem. While Chairwoman Yellen is probably more “full employment” and less “price stability” than past Fed Chairs, she is not that different than either Chairman Bernanke or Greenspan. As I have said before, I believe it is the Fed’s dual mandate that is the problem. (A mandate that no person can dispute if they want to be confirmed as a Fed Chair or appointed as a Fed Governor.) This well-intended dual mandate, I believe causes unrealistic expectations for U.S. monetary policy, which in turn creates monetary instability; a major cause of the most recent financial crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Excerpts from Incoming Federal Reserve Chairwoman Yellen’s January 20, 2014 Time magazine profile:

“I’d like to see real wages going up,” Yellen says, adding that the average American male worker’s inflation adjusted wages have been flat or down for the past 20 years.

Those words may not sound uncommon, but in an institution where people often speak in algorithms rather than English and live in a statistical bubble, Yellen’s focus on the human impact of economics is a true shift. Central bankers have, as she puts it, “an important role in public policy and a moral responsibility to take part in it.” The job, as she sees it, “isn’t just about fighting inflation or monitoring the financial system. It’s about trying to help ordinary households get back on their feet and about creating a labor market where people can feel secure and work and get ahead.”

Excerpts from Swiss Chairman Jordan’s January 16, 2014 speech, “A new role for central banks?”:

“…..On the contrary. Their job is to fulfill their statutory mandate, whereby in most cases the focus is on price stability. That is also the case for the Swiss National Bank (SNB), whose mandate is sensible and credible, and can be fulfilled.”

“What also appears important to me is that central banks do not take on tasks that they cannot tackle with their existing instruments, thereby awaking false expectations and hopes. To ensure that monetary policy remains effective, it is important that central banks do not depart from their mandate of price stability. If expectations are too high, central banks are bound to disappoint them in the long run. This will cause them to lose credibility in their core area, and this could lead to politicians becoming involved. In this situation, central banks’ independence would be at stake. Caution is to be recommended with respect to monetary policy trends. Certainly, the SNB will not simply go with the general flow, but will instead pursue its own path tailored to the needs of our country.”

“To put it somewhat bluntly, this fallacy can be described as follows: Now that central banks had done so much to save the economy and the financial system from collapsing, they should be permanently in charge of ensuring sound economic growth, high employments, low interest rates and a healthy real estate market.”

“Such extremely high expectations are exceedingly dangerous. Central banks would be forced into a role in which they had to fulfil tasks for which they neither have the requisite responsibilities nor the appropriate instruments. As a result, other agents could be induced to neglect their responsibilities.”

“What can central banks do to counter such unrealistic expectations? They can, for instance, communicate clearly and emphatically what their role is and where their limits are.”

“Third, it is suggested that further criteria be added to price stability…relating to employment and growth, for instance. Growth and employment are, of course, essential economic parameters. Our mandate take them into account with its reference to the development of the economy. However, specific requirements with regard to growth and employment would, once again, raise expectations which the SNB could not meet in the long term. Instead, the goal of monetary policy with respect to the economy must be to reduce larger risks and alleviate extreme situations.”

“Monetary policy is not suited to fine-tuning the economy, however. In practice, we have learned that is impossible to conduct monetary policy which responds immediately and in a differentiated manner to all kinds of business cycle fluctuation. Neither can monetary policy replace a sustainable growth policy, a well-balanced fiscal policy, a well functioning labour market or an open world trade regime. It is important to avoid illusions in this respect. Monetary policy cannot assume responsibility for everything.”

“Nevertheless, no central banks should simply jump on the latest monetary policy bandwagon without careful consideration. On the contrary. Changes must be undertaken with great care.”

“In the long run, a central bank can only pursue an autonomous monetary policy in line with the needs of its country if it is independent….What independence also means, however, is the responsibility to use this freedom strictly within the meaning of the statutory mandate, no matter what the prevailing political climate may be. Independence cannot be taken for granted, it is a privilege…..As a counterweight to its independence, the SNB has a duty of accountability and information with respect to parliament and the public. The SNB is thus firmly anchored in our constitutional democracy. In a free society, an authority with a complete free hand would be a foreign body.”

“Yet independence must be lived. The SNB may not accept instructions from political authorities; neither can it allow itself to be put under pressure by public opinion. It must conduct a monetary policy that serves the interests of the country as a whole, to the best of its ability, and in accordance with its mandate. It is only natural that our monetary policy cannot please everyone at all times. However, an independent central bank must not be put off by this.”

“Central banks should not be pushed into a role which awakes false expectations and hopes. In the long term, a central bank makes the biggest contribution towards a prosperous development of the economy if it is guided by a clear mandate towards a prosperous development of the economy if it is guided by a clear mandate and consistently discourages excessive expectations. By fulfilling its price and financial stability mandate reliably, it builds up confidence in the general public and on the markets….confidence which is so important for the economy.”

“However, there is another area in which the Confederation and cantons have made an even more important contribution to the independence of monetary policy. They put the favourable years before the crisis to good use by making their public finances pretty weatherproof. As a result, Switzerland was one of the few countries where government finances did not deteriorate substantially in the crisis. Sound government finances are essential not only for the competitive strength of an economy but also for safeguarding social security institutions…and thus for social cohesion. In the long term, excessive government indebtedness can also endanger price stability and the independence of monetary policy; one reason for this is that it increases the temptation to keep interest rates very low for longer than necessary.”

“I am firmly convinced that no change is needed in the SNB’s current mandate and therefore with regard to its fundamental role in monetary policy. Our job is to ensure price stability while taking due account of economic developments. This is a sensible and credible mandate. Our clear definition of price stability has also stood the test of time. The SNB equates to price stability with a rise in the national consumer price index of less than 2% a year.”

“Consequently, it is clear….and well-established historically….that central banks make an important contribution to financial stability. In fact, several central banks were founded specifically for this purpose. The idea was that the central bank should serve as the lender of last resort, thereby protecting the banking system from collapse. In Switzerland, the SNB has always been the lender of last resort.”

“Ladies and gentlemen, we have reached the end of our perusal of monetary policy and financial stability. I particularly wanted to show you which roles can and cannot be assumed by central banks and especially by the SNB.”

“A central bank which is guided by this model when fulfilling its mandate and consistently discourages excessive expectations makes the biggest contribution towards a prosperous development of the economy, thereby serving the overall interests of the country in the best manner. By fulfilling its price and financial stability mandate steadily and reliably over a longer period, a central bank builds up confidence in the general public and on the markets….confidence which is extremely important for the development of the economy.”

Summary: “A new role for central banks?”, Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, January 16, 2014

Complete Text: “A new role for central banks?”, Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, January 16, 2014

“I did not have sexual relations with that woman, Miss Lewinsky.”, President Bill Clinton, Jan. 26, 1998

“Unbelievably, even before he made this public statement he had used a technicality to avoid perjuring himself under oath.  After these statements and many more public denials, Clinton was finally forced to leave the technicality behind, and under oath on August 17, 1998 he admitted he had an “improper physical relationship” with Lewinsky. In other words, when President Clinton was not under oath and not at risk of committing perjury, he lied to the American public. It was only when he was under oath and directly challenged, that he told the truth.  The article below is unbelievable to me and I am surprised it has not received more attention. Mr. McGraw has provided an affidavit, a signed and sworn legal document (for which he can be prosecuted for perjury if he is not telling the truth), saying that U.S. Treasury Secretary Geithner threatened Standard & Poors over its 2011 decision to downgrade the U.S. government’s AAA credit rating. (This alleged threat was made to seek a reversal of S&P’s decision before its public release.) In response to this affidavit becoming public, Mr. Geithner, through a spokesperson, has denied making such a threat. Keep in mind, Mr. Geithner’s denial is NOT a sworn legal document and if he is lying, he cannot be prosecuted for perjury. Keep in mind, it appears from the article below that the substance of this discussion can be corroborated by Mr. Checki; a New York Fed official and that the New York Fed has declined to comment. Keep in mind that Mr. Geithner’s angry public statements at the time, regarding S&P’s downgrade, also seem to provide support for Mr. McGraw’s account.  And finally, keep in mind that a potential S&P downgrade and loss of the U.S.’s AAA credit rating would be occurring for the first time in history; a negative and potentially risky event that any administration and U.S. Treasury Secretary would naturally be concerned about (both for the Country and their own reputations) and try to argue against and prevent.  Given all of this, who do you believe is telling the truth? I can tell you that I am going to believe Mr. McGraw until both Mr. Geithner and Mr. Checki provide sworn affidavits and/or testimony that refute Mr. McGraw’s account (and I don’t think that’s going to happen). Also, think of the hypocrisy of Mr. McGraw’s account if true. The U.S. government (and others) has sued bankers saying among other allegations, that they sought to improperly pressure rating agencies to grant higher credit ratings on mortgage-backed and other securities. That pressure, the potential loss of business from one private company/issuer of securities, isn’t even in the same ballpark to the pressure Mr. McGraw and Standard & Poors must have felt when the sitting United States Treasury Secretary, threatens to bring the full weight of the U.S. government down upon them.”, Mike Perry, former Chairman and CEO, IndyMac Bank

S&P Chief Says Geithner Warned About U.S. Downgrade

Treasury Secretary Allegedly Said Firm Would be Held Accountable

By 

BRADLEY HOPE and

DAMIAN PALETTA

Updated Jan. 21, 2014 4:51 p.m. ET

An angry Timothy Geithner warned the chairman of Standard & Poor’s Ratings Services’ parent company that the firm would be held accountable for its 2011 downgrade of U.S. debt, a legal filing alleges.

In a phone call with Harold McGraw III three days after the downgrade, Mr. Geithner argued that S&P had made an error in its calculations and said the firm’s conduct would be “looked at very carefully,” according to an affidavit from Mr. McGraw.

Mr. Geithner, who was Treasury secretary at the time, never made an explicit threat but said the government wouldn’t let S&P’s action pass without a response, Mr. McGraw said.

Timothy F. Geithner Bloomberg News

The account of the phone call was filed as part of a $5 billion fraud lawsuit brought last year by the Justice Department against S&P. The government alleges that S&P ignored its own standards in assigning credit ratings to mortgage bonds that imploded during the financial crisis, costing investors billions of dollars. The ratings firm, which is a unit of McGraw Hill Financial Inc., has long maintained the lawsuit was retaliation for its downgrade of U.S. debt.

“The allegation that former Secretary Geithner threatened or took any action to prompt retaliatory government action against S&P is false,” a spokeswoman for Mr. Geithner said.

The affidavit also adds a personal element to the dispute for both Mr. McGraw, who has previously tried to stay above the fray, and Mr. Geithner, who is writing a memoir about his tenure as Treasury secretary and is scheduled to start a new job with private-equity firm Warburg Pincus LLC on March 1. The document was filed on Monday in U.S. District Court in Santa Ana, Calif.

A spokeswoman for the Justice Department said there was “absolutely no connection” between the downgrade and the Justice lawsuit.

S&P’s announcement on Aug. 5, 2011, that it was stripping the U.S. of its triple-A debt rating came just days after the government averted a debt-ceiling crisis. The first-ever downgrade of the U.S. roiled world markets and highlighted the impact of political infighting on the economy.

The Friday evening decision came after a heated back-and-forth debate between senior Treasury officials and S&P.

Treasury officials discovered what they felt was a $2 trillion error in the baseline assumptions that S&P had used to model the growth of U.S. debt. Despite the Treasury pressure, S&P didn’t waver. The firm said at the time that the political “debacle” over whether to raise the debt ceiling was one of the factors that went into its decision.

“I think S&P has shown really terrible judgment, and they’ve handled themselves very poorly,” Mr. Geithner told CNBC two days after S&P’s decision.

S&P officials at the time painted the Obama administration’s backlash as a predictable reaction by any company or government that lost its top rating. S&P has denied its downgrade was based on any error and has described the government’s civil lawsuit as “meritless.”

Mr. McGraw, whose great-grandfather founded McGraw Hill, in the affidavit said he received a message on the Sunday after the downgrade from Terrence Checki, who was then the executive vice president of the Federal Reserve Bank of New York, where Mr. Geithner was president before becoming Treasury secretary. Mr. McGraw returned the call the next day.

“He told me that he was calling to pass a message to me from Timothy Geithner,” Mr. McGraw said of the Aug. 8, 2011, phone call, in the affidavit. “He said that Secretary Geithner was very angry at S&P. He said that Mr. Geithner viewed S&P’s processes as flawed.”

A spokesman for the New York Fed declined to comment.

Later that morning, he missed a call from Mr. Geithner that was later returned, Mr. McGraw said in the affidavit. Treasury Department records show the men spoke between 10:15 a.m. and 10:25 a.m.

During that call, Mr. Geithner said the executive and his ratings firm had “done an enormous disservice to yourselves and your country,” according to Mr. McGraw’s affidavit.

Mr. Geithner claimed S&P had made a major error in its calculations and that “you are accountable for that,” Mr. McGraw said of the conversation. Mr. Geithner then told him that the downgrade had done damage to the U.S. economy and that S&P’s conduct would be “looked at very carefully,” according to the affidavit.

It isn’t clear what impact Mr. McGraw’s affidavit could have on the case, in part because it appears based solely on his own recollection of the conversation, said Jeffrey Manns, an associate professor of law at George Washington University.

“The conversation can easily be contested because they don’t appear to have any recording or other proof,” Mr. Manns said. “What S&P is trying to do here is put some doubt in the jury members’ minds about why S&P was singled out in a case.”

However, Mr. Manns added that the affidavit may be useful in persuading the court to allow S&P access to more internal government records.

The retaliation claim is just one of several defenses S&P has offered. In previous filings, S&P lawyers have argued that while the firm’s ratings are independent and objective, in two earlier court decisions, judges have ruled that such statements by a firm were puffery and therefore can’t form the basis for a fraud claim.

Write to Bradley Hope at bradley.hope@dowjones.com

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“During the pre-crisis boom, homebuyers were encouraged to borrow heavily to finance undiversified investments in a single home, while governments provided guarantees to mortgage investors. In the U.S., this occurred through implicit guarantees of assets held by the Federal Housing Administration (FHA) and the mortgage agencies Fannie Mae and Freddie Mac.”, 2013 Nobel Laureate in Economics, Robert J. Shiller

“The truth is emerging. Unlike the mainstream press (“it’s too technical for them”, Shiller) and the disputed, politically-motivated majority opinion of The U.S. Financial Crisis Commission, Shiller isn’t blaming private bankers, mortgage lenders, and Wall Street. He blames (well-intended) government housing policies, FHA and the government-sponsored enterprises Fannie Mae and Freddie Mac  for fueling mal-investment and the unsustainable housing bubble and he notes that their core risks remain largely unaddressed post-crisis. I agree. Other experts believe that pre-crisis FED monetary policies and U.S. trade and investment imbalances were also major causes of the crisis. I agree. In regards to Shiller’s (and others) comments below about FHA, they are similar to the views I expressed (and extensive data and analysis I provided) in my February 26, 2013 blog postings: Statement’s #41 and #42.” Mike Perry, former Chairman and CEO, IndyMac Bank

BUSINESS & FINANCE

Photo of Robert J. Shiller

Robert J. Shiller

Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the second edition of which predicted the coming collapse of the real-estate bubble, and, most recently, Finance and the Good Society.

JAN 14, 2014

The Financial Fire Next Time

NEW HAVEN – If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated. Not only does effective crisis prevention require overhauling our financial institutions through creative application of the principles of good finance; it also requires that politicians and their constituents have a shared understanding of these principles.

Today, unfortunately, such an understanding is missing. The solutions are too technical for most news reporting aimed at the general public. And, while people love to hear about “reining in” or “punishing” financial leaders, they are far less enthusiastic about asking these people to expand or improve financial-risk management. But, because special-interest groups have developed around existing institutions and practices, we are basically stuck with them, subject to minor tweaking.

The financial crisis, which is still ongoing, resulted largely from the boom and bust in home prices that preceded it for several years (home prices peaked in the United States in 2006). During the pre-crisis boom, homebuyers were encouraged to borrow heavily to finance undiversified investments in a single home, while governments provided guarantees to mortgage investors. In the US, this occurred through implicit guarantees of assets held by the Federal Housing Administration (FHA) and the mortgage agencies Fannie Mae and Freddie Mac.

At a session that I chaired at the American Economic Association’s recent meeting in Philadelphia, the participants discussed the difficulty of getting any sensible reform out of governments around the world. In a paper presented at the session, Andrew Caplin of New York University spoke of the public’s lack of interest or comprehension of the rising risks associated with the FHA, which has been guaranteeing privately-issued mortgages since its creation during the housing crisis of the 1930’s.

Caplin’s discussant, Joseph Gyourko of the Wharton School, concurred. Gyourko’s own 2013 study concludes that the FHA, now effectively leveraged 30 to one on guarantees of home mortgages that are themselves leveraged 30 to one, is underwater to the tune of tens of billions of dollars. He wants the FHA shut down and replaced with a subsidized saving program that does not attempt to compete with the private sector in evaluating mortgage risk.

Similarly, Caplin testified in 2010 before the US House Committee on Financial Services that the FHA was at serious risk, a year after FHA Commissioner David Stevens told the same committee that “We will not need a bailout.” Caplin’s research evidently did not sit well with FHA officials, who were hostile to Caplin and refused to give him the data he wanted. The FHA has underestimated its losses every year since, while proclaiming itself in good health. Finally, in September, it was forced to seek a government bailout.

At the session, I asked Caplin about his effort, starting with his co-authored 1997 book Housing Partnerships, which proposed allowing homebuyers to buy only a fraction of a house, thereby reducing their risk exposure without putting taxpayers at risk. If implemented, his innovative idea would reduce homeowners’ leverage. But, while it was a highly leveraged mortgage market that fueled the financial crisis 11 years later, the idea, he said, has not made headway anywhere in the world.

Why not, I asked? Why can’t creative people with their lawyers simply create such partnerships for themselves? The answer, he replied, is complicated; but, at least in the US, one serious problem looms large: the US Internal Revenue Service’s refusal to issue an advance ruling on how such risk-managing arrangements would be taxed. Given the resulting uncertainty, no one is in a mood to be creative.

Meanwhile, there is strong public demand – angry and urgent – for a government response aimed at preventing another crisis and ending the problem of “too big to fail” financial institutions. But the political reality is that government officials lack sufficient knowledge and incentive to impose reforms that are effective but highly technical.

For example, one reform adopted in the US to help prevent the “too big to fail” problem is the risk retention rule stipulated by the 2010 Dodd Frank Act. In order to ensure that mortgage securitizers have some “skin in the game,” they are required to retain an interest in 5% of the mortgage securities that they create (unless they qualify for an exemption).

But, in another paper presented at our session, Paul Willen of the Federal Reserve Bank of Boston argued that creating such a restriction is hardly the best way for a government to improve the functioning of financial markets. Investors already know that people have a stronger incentive to manage risks better if they retain some interest in the risk. But investors also know that other factors may offset the advantages of risk retention in specific cases. In trying to balance such considerations, the government is in over its head.

The most fundamental reform of housing markets remains something that reduces homeowners’ overleverage and lack of diversification. In my own paper for the session, I returned to the idea of the government encouraging privately-issued mortgages with preplanned workouts, thereby insuring them against the calamity of ending up underwater after home prices fall. Like housing partnerships, this would be a fundamental reform, for it would address the core problem that underlay the financial crisis. But there is no impetus for such a reform from existing interest groups or the news media.

One of our discussants, Joseph Tracy of the Federal Reserve Bank of New York (and co-author of Housing Partnerships), put the problem succinctly: “Firefighting is more glamorous than fire prevention.” Just as most people are more interested in stories about fires than they are in the chemistry of fire retardants, they are more interested in stories about financial crashes than they are in the measures needed to prevent them. That is not a recipe for a happy ending.

http://www.project-syndicate.org/commentary/robert-j–shiller-asks-why-innovative-ideas-to-prevent-another-financial-crisis-have-gained-no-political-or-media-traction

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Read more at http://www.project-syndicate.org/commentary/robert-j–shiller-asks-why-innovative-ideas-to-prevent-another-financial-crisis-have-gained-no-political-or-media-traction#EdA20QUSeilP4SDK.99

“The private plaintiffs’ litigation against me, as CEO of IndyMac Bank, was entirely without merit. From day one they never intended to prove a single allegation (and they didn’t). It was all about extracting settlement money from D&O insurance policies, like their scamming brethren in asbestos suits.”, Mike Perry

Excerpts from Joe Nocera’s January 14, 2014, NY Times OpEd: “The Asbestos Scam, Part 2”:

“As to why anyone should care whether innocent companies have to pay millions to asbestos victims and their lawyers, I would offer three reasons. First, when victims get more than they should under the rules, it means that someone else down the road will wind up with less than he or she should. Second, litigation designed to bring innocent companies to their knees is an impediment to economic growth and job creation.

And, finally, there is the rule of law, which the asbestos lawyers suing Garlock clearly flouted. We are very good in this country at pointing out the failure of other countries’ judicial systems to abide by the rule of law. Shouldn’t we be just as rigorous when the failure is our own?”

The Opinion Pages|Op-Ed Columnist

The Asbestos Scam, Part 2

Joe Nocera

Six weeks ago, I wrote a column about a ridiculous lawsuit being brought by Carolyn McCarthy, a congresswoman from Long Island. A smoker for most of her life, McCarthy has lung cancer. Yet her lawyers claimed that it was her “exposure” to asbestos, through the work clothes of her father and brother, both boilermakers, that triggered her cancer. Though McCarthy certainly deserves our sympathy as she fights cancer, it is hard to see her lawsuit as anything but an undeserved money grab — and the latest twist in asbestos litigation, the longest running tort in American history, with no end in sight.

Then again, maybe there is finally an end in sight. Late Friday afternoon, Judge George Hodges, a federal bankruptcy judge in North Carolina, wrote a breathtaking decision, in which he essentially pulled the lid off another form of asbestos scam. Though he shrank from labeling the actions of the plaintiffs’ lawyers involved in asbestos litigation as “fraudulent,” he did describe the litigation as “infected with the impropriety of some law firms.” It’s a potential game-changer.

There are two reasons it can be difficult to write about asbestos lawsuits. The first is that the modern-day plaintiff truly is sick — if not with lung cancer then with mesothelioma, a deadly disease that results from extensive exposure to asbestos decades earlier. Given the rules of American society, mesothelioma victims undoubtedly deserve compensation from whichever company used the product that caused their illness.

The second reason is that asbestos litigation has become more complicated than 3-D chess. For years, it was easy to explain the scam: People who weren’t sick were being diagnosed with asbestosis by doctors being paid by asbestos lawyers. That has largely ended — hence the current emphasis on mesothelioma lawsuits, which have the added advantage (for the lawyers) of being potentially multimillion-dollar cases. Today, with around 100 companies having been bankrupted by asbestos litigation, and $37 billion set aside in trusts for victims, you would think the litigation would be winding down. Guess again.

Enter Garlock Sealing Technologies, a maker of gaskets. For years, it was on the periphery of asbestos litigation because, while its gaskets had once contained asbestos, it was a kind that had 1/100th of the risk of the more commonly used product. In addition, the asbestos was sealed, usually behind far-more-dangerous asbestos insulation made by some other, more culpable, company.

Stephen Macadam, the chief executive of EnPro, Garlock’s parent company, told me that he had expected that the litigation pressure would ease on Garlock as other companies succumbed to bankruptcy and set up trusts for victims. Instead, the opposite happened. Garlock became a prime target, precisely because it was still standing.

For years, Garlock had made calculated decisions about how to deal with its asbestos litigation. It fought some cases and settled others. But, by 2010, inundated with mesothelioma cases, it too filed for bankruptcy protection. Then it did something different. It fought back.

The judge allowed the company to do a deep dive into 15 cases that Garlock had previously settled. For a victim to demand money from Garlock, he or she had to stipulate that Garlock’s gasket had been a primary exposure to asbestos. To maximize the money they could get from Garlock, they would deny, under oath, other exposures to the products of the bankrupt companies that had set up trusts.

But as Garlock soon discovered, no sooner had the victims settled then they would file documents with a dozen or more trusts stipulating the opposite: that they had had “meaningful and credible exposure” to asbestos from the bankrupt companies. (The plaintiffs’ lawyers, who control the trusts, have successfully fought to keep this information confidential.) Judge Hodges, in his decision, seemed thunderstruck that this pattern occurred in every case that Garlock investigated. The phrase he used to describe this behavior was “withholding evidence.”

It would have been helpful if this decision had come a decade or more ago, before so many companies were forced into bankruptcy. But maybe, just maybe, other companies will start to follow Garlock’s example and finally put an end to the asbestos scam.

As to why anyone should care whether innocent companies have to pay millions to asbestos victims and their lawyers, I would offer three reasons. First, when victims get more than they should under the rules, it means that someone else down the road will wind up with less than he or she should. Second, litigation designed to bring innocent companies to their knees is an impediment to economic growth and job creation.

And, finally, there is the rule of law, which the asbestos lawyers suing Garlock clearly flouted. We are very good in this country at pointing out the failure of other countries’ judicial systems to abide by the rule of law. Shouldn’t we be just as rigorous when the failure is our own?

“And part of the (economic stimulus from FED monetary policy) comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.”, Janet Yellen

Excerpts from Rana Forooohar’s January 20, 2014 Time interview with new Fed Chair Janet Yellen (and Mike Perry’s comments):

As the New Fed Chief, she now has the world’s largest economy in her hands.

“I’d like to see real wages going up,” Yellen says, adding that the average American male worker’s inflation adjusted wages have been flat or down for the past 20 years.

Those words may not sound uncommon, but in an institution where people often speak in algorithms rather than English and live in a statistical bubble, Yellen’s focus on the human impact of economics is a true shift. Central bankers have, as she puts it, “an important role in public policy and a moral responsibility to take part in it.” The job, as she sees it, “isn’t just about fighting inflation or monitoring the financial system. It’s about trying to help ordinary households get back on their feet and about creating a labor market where people can feel secure and work and get ahead.”

Comment from Mike Perry: “Yellen’s sentiments above are highly admirable, but step back for a minute and think about the FED’s role in relation to them. The FED only controls monetary policy. They have a major impact on nominal prices, which can affect the real economy in the short run. However, in the long run, FED monetary distortions will have to end and the free marketplace and our laws, regulations, and fiscal policy will determine economic activity, the labor market and real wages. To me, it’s naïve and a little scary for a FED Chairperson to express the view that the FED can affect real wages or labor market issues like job security and advancement opportunities. It can’t.”

“You know, a lot of people say this (asset buying) is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending,” she says. “And part of the (economic stimulus) comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.” Translation: a rising tide can lift all boats. That’s a phrase that’s been associated with conservatives in recent years, but it’s worth remembering that Kennedy said it first….and Yellen still believes it.

Comment from Mike Perry: “Yellen admits here (as Bernanke and Greenspan have) that the FED’s monetary policies are distorting (temporarily) the nominal price of assets like homes and stocks, causing people to make economic decisions (like spending, asset purchases/sales, and/or borrowing) that they would otherwise not make. In my and many others view, the FED hasn’t learned the most important lessons from the most recent financial/economic crisis about their monetary policy distortions, because their hubris (and desire to protect the FED as an institution) has prevented them from admitting their major role in causing it. Almost unbelievably, they are once again determined to use their monetary powers to create unsustainable nominal asset bubbles, which spur temporary economic activity (and do benefit the rich and powerful more than the poor), but whose distorting effects cause mal-investment and significant economic volatility and ultimately harm real, long-term economic growth.”

“Look at me. Helpless, tortured, shot, blown up, my best buddies all dead, and all because we were afraid of the liberals back home, afraid to do what was necessary to save our own lives. Afraid of American civilian lawyers.”, Marcus Luttrell

Marcus Luttrell is a former United States Navy Seal, who received the Navy Cross for his actions in June 2005 facing Taliban fighters during Operation Redwing. He is the co-author of New York Times bestseller “Lone Survivor: The Eyewitness Account of Operation Redwing and The Lost Heroes of Seal Team 10”. A film version starring Mark Wahlberg is being released to nationwide audiences this week.

Excerpts from “Lone Survivor”, pages 28 to 30:

“Looking back, during our long journey in the C-130 to Afghanistan, I was more acutely aware of a growing problem which faces U.S. forces on active duty in theaters of war all over the world. For me, it began in Iraq, the first murmurings for the liberal part of the U.S.A. that we were somehow in the wrong, brutal killers, bullying other countries; that we who put our lives on the line for our nation at the behest of our government should somehow be charged with murder for shooting our enemy.

It’s been an insidious progression, the criticisms of the U.S. Armed Forces from politicians and from the liberal media, which knows nothing of combat, nothing of our training, and nothing of the mortal dangers we face out there on the front line. Each of the six of us in that aircraft en route to Afghanistan had constantly in the back of our minds the ever-intrusive rules of engagement.

These are drawn up for us to follow by some politicians sitting in some distant committee room in Washington D.C. And that’s a very long way from the battlefield, where a sniper’s bullet can blast your head, where the slightest mistake can cost your life, where you need to kill your enemy before he kills you.

And those ROE are very specific: we may not open fire until we are fired upon or have positively identified our enemy and have proof of his intentions. Now, that’s all very gallant. But how about a group of U.S. soldiers who have been on patrol for several days; have been fired upon; have dodged rocket-propelled grenades and homemade bombs; have sustained casualties; and who are very nearly exhausted and maybe slightly scared?

How about when a bunch of guys wearing colored towels around their heads and brandishing AK-47s come charging over the horizon straight toward you? Do you wait for them to start killing your team, or do you mow the bastards down before they get a chance to do so?

The situation might look simple in Washington, where human rights of terrorists are often given high priority. And I am certain liberal politicians would defend their position to the death. Because everyone know liberals have never been wrong about anything. You can ask them. Anytime.

However, from the standpoint of the U.S. combat soldier, Ranger, SEAL, Green Beret, or whatever, these ROE represent a very serious conundrum. We understand we must obey them because they happen to come under the laws of the country we are sworn to serve. But they represent a danger to us; they undermine our confidence on the battlefield in the fight against world terror. Worse yet, they make us concerned, disheartened, and sometimes hesitant.

I can say from firsthand experience that those rules of engagement cost the lives of three of the finest U.S. Navy SEALs who have ever served. I’m not saying that, given the serious situation, those elite American warriors might not have died a little later, but they would not have died right then, and in my view would almost certainly have been alive today.

I realize I am not being specific, and I have no intention of being so. But these broad brushstrokes are designed to show how the rules of engagement are a clear and present danger, frightening young soldiers, who have been placed in harm’s way by their government, into believing they may be charged with murder if they defend themselves too vigorously.

I simply do not want to see some of the best young men in the country hesitating to join the elite branches of the U.S. Armed Services because they’re afraid they might be accused of war crimes by their own side, just for attacking the enemy.”

Excerpts from “Lone Survivor”, pages 121 to 124:

“The truth is, in this kind of terrorist/insurgent warfare, no one can tell who’s a civilian and who’s not. So what’s the point of framing rules that cannot be comprehensively carried out by anyone? Rules that are unworkable, because half the time no one knows who the goddamned enemy is, and by the time you find out, it might be too late to save your own life. Making sense of the ROEs in real-time is almost impossible.

Also, no one seems clear on what we should be called in Afghanistan. Are we a peace-keeping force? Are we fighting a war against insurgents on behalf of the Afghan government, or are we fighting it on behalf of the U.S.A.? Are we trying to hunt down the master terrorist bin Laden, or are we just trying to prevent the Taliban from regaining control of the country, because they were the protectors of bin Laden and all who fought for him?

We’re loyal servants of the U.S. government. But Afghanistan involves fighting behind enemy lines. Never mind there’s no shooting across the border in Pakistan, the illegality of the Taliban army…..

When we’re patrolling those mountains, trying everything we know to stop the Taliban regrouping, striving to find and arrest the top commanders and explosive experts, we are always surrounded by a well-armed, hostile enemy whose avowed intention is to kill us all. That is behind enemy lines. Trust me.

And we’ll go there. All day. Every day. We’ll do what were supposed to do, to the letter, or die in the attempt. On behalf of the U.S.A. But don’t tell us who we can attack. That ought to be up to us, the military. And if the liberal media and political community cannot accept that sometimes the wrong people get killed in war, then I can only suggest they first grow up and then serve a short stint up in the Hindu Kush. They probably would not survive.

The truth is, any government that thinks war is somehow fair and subject to rules like a baseball game probably should not get into one. Because nothing’s fair in war, and occasionally the wrong people do get killed. It’s been happening for about a million years. Faced with the murderous cutthroats of the Taliban, we are not fighting under the rules of Geneva IV Article 4. We are fighting under the rules of Article 223.556mm….that’s the caliber and bullet gauge of our M4 rifle. And if those numbers don’t look good, try Article .762mm, that’s what the stolen Russian Kalashnikovs fire at us, usually in deadly, heavy volleys.

In the global war on terror, we have rules, and our opponents use them against us. We try to be reasonable; they will stop at nothing. They will stoop to any form of base warfare: torture, beheading, mutilation. Attacks on innocent civilians, women and children, car bombs, suicide bombers, anything the hell they can think of. They’re right up there with the monsters of history.

And I ask myself, Who’s prepared to go furthest to win this war? Answer: they are. They’ll willingly die to get their enemy. They will take it to the limit, any time, any place, whatever it takes. And they don’t have any rules of engagement.

Thus we have an extra element of fear and danger when we go into combat against the Taliban or al Qaeda….the fear of our own, the fear of what our own navy judge advocate general might rule against us, the fear of the American media and their unfortunate effect on American politicians. We all harbor fears about untrained, half-educated journalists who only want a good story to justify their salaries and expense accounts. Don’t think it’s just me. We all detest them, partly for their lack of judgment, mostly because of their ignorance and toe-curling opportunism. The first minute an armed conflict turns into a media war, the news becomes someone’s opinion, not hard truths. When the media gets involved, in the United States, that’s a war you’ve got a damned good chance of losing, because the restrictions on us are immediately amplified, and that’s sensationally good news for the enemy.

The Navy SEALs can deal…with any enemy. But not if someone wants to put us in jail for it back home in the U.S.A. And we sure as hell don’t want to hang around the mountains waiting for someone to cut our throats, unable to fight back just in case he might be classified as an unarmed Afghan farmer.

But these are the problems of the modern U.S. combat soldier, the constant worry about overstepping the mark and an American media that delights in trying to knock us down. Which we have done nothing to deserve. Except, perhaps, love our country and everything it stands for.”

Excerpts from “Lone Survivor”, pages 144 to 152:

“The question was, What did we do now? They were very obviously goatherds, farmers of the high country. Or, as it states in the pages of the Geneva Convention, unarmed civilians. The strictly correct military decision would still be to kill them without further discussion, because we could not know their intentions.

How could we know if they were affiliated with a Taliban militia group or sworn by some tribal blood pact to inform the Taliban leaders of anything suspicious-looking they found in the mountains? And, oh boy, were we suspicious-looking.

The hard fact was, if these three Afghan scarecrows ran off to find Sharmak and his men, we were going to be in serious trouble, trapped out here on this mountain ridge. The military decision was clear: these guys could not leave their alive. I just stood there, looking at their filthy beards, rough skin, gnarled hands, and hard, angry faces. These guys did not like us. They showed no aggression, but neither did they offer or want the hand of friendship.

Axelson was our resident academic as well as our Trivial Pursuit king. And Mikey asked him what he considered we should do. “I think we should kill them, because we can’t let them go,” he replied, with pure, simple logic of the born intellect.

“And you, Danny?”

“I don’t really give a shit what we do,” he said. “You want me to kill ‘em, I’ll kill ‘em. Just give me the word. I only work here.”

“Marcus?”

“Well, until right now I’d assumed killing ‘em was our only option. I’d like to hear what you think, Murph.”

Mikey was thoughtful. “Listen, Marcus. If we kill them, someone will find their bodies real quick. For a start, these fucking goats are just going to hang around. And when these guys don’t get home for their dinner, their friends and relatives are going to head straight out to look for them, especially for this fourteen-year-old. The main problem is the goats. Because they can’t be hidden, and that’s where people will look.”

“When they find the bodies, the Taliban leaders will sing to the Afghan media. The media in the U.S.A. will latch on to it and write stuff about the brutish U.S. Armed Forces. Very shortly after that, we’ll be charged with murder. The murder of innocent unarmed Afghan farmers.”

I had to admit, I had not really thought about it quite like that. But there was a terrible reality about Mikey’s words. Was I afraid of these guys? No. Was I afraid of their possible buddies in the Taliban? No. Was I afraid of the liberal media back in the U.S.A.? Yes. And I suddenly flashed on the prospect of many, many, years in a U.S. civilian jail alongside murderers and rapists.

And yet…as a highly trained member of the U.S. Special Forces, deep in my warrior’s soul I knew it was nuts to let these goatherds go. I tried to imagine what the great military figures of the past would have done. Napoleon? Patton? Omar Bradley? MacArthur? Would they have made the ice-cold military decision to execute these cats because they posed a clear and present danger to their men?

If these Afghans blew the whistle on us, we might all be killed, right out here on this rocky, burning-hot promontory, thousands and thousands of miles from home, light-years from help. The potential force against us was too great. To let these guys go on their way was military suicide.

All we knew was Sharmak had between 80 and 200 armed men. I remember taking the middle number, 140, and asking myself how I liked those odds of 140 to 4. That’s 35 to 1. Not much.

Mike Murphy said quietly, “We’ve got three options. We plainly don’t want to shoot these guys because of the noise. So, number one, we could just kill them quietly and hurl their bodies over the edge. That’s probably a thousand-foot drop. Number two is we kill them right here, cover ‘em up as best we can with rocks and dirt…..Number three, we turn ‘em loose, and still get the hell out, in case the Taliban come looking.”

He stared at us. I can remember it like it was yesterday. Axe said firmly, “We’re not murderers. No matter what we do. We’re on active duty behind enemy lines, sent here by our senior commanders. We have a right to do everything we can to save our own lives. The military decision is obvious. To turn them loose would be wrong.”

If this came to a vote, as it might, Axe was going to recommend the execution of three Afghans. And in my soul, I knew he was right. We could not possibly turn them loose. But my trouble is, I have another soul. My Christian soul. And it was crowding in on me. Something kept whispering in the back of my mind, it would be wrong to execute these unarmed men in cold blood.

I guess all four of us were Christians, and if we were thinking like ordinary law-abiding U.S. citizens, we would find it very hard to carry out the imperative military decision, the overriding one, the decision any great commander would have made: these guys can never leave this place alive. The possible consequences of that were unacceptable. Militarily.

Lieutenant Murphy said, “Axe?”

“No choice.” We all knew what he meant.

“Danny?”

“As before. I don’t give a shit what you decide. Just tell me what to do.”

“Marcus?”

“I don’t know, Mikey.”

“Well, let me tell you one more time. If we kill these guys we have to be straight about it. Report what we did. We can’t sneak around on this. Just so you all understand, their bodies will be found, the Taliban will use it to the max. They’ll get it in the papers, and the U.S. liberal media will attack us without mercy. We will almost certainly be charged with murder. I don’t know how you guys feel about that….Marcus, I’ll go with you. Call it.”

I just stood there. I looked again at these sullen Afghan farmers. Not one of them tried to say a word to us. They didn’t need to. Their glowering stares said plenty. We didn’t have rope to bind them. Tying them up to give us more time to establish a new position wasn’t an option.

I looked Mikey right in the eye, and I said, “We gotta let ‘em go.”

It was the stupidest, most southern-fried, lamebrained decision I ever made in my life. I must have been out of my mind. I had actually cast a vote which I knew could sign our death warrant. I’d turned into a fucking liberal, a half-assed, no-logic nitwit, all heart, no brain, and the judgment of a jackrabbit.

At least, that’s how I look back on those moments now. Probably not then, but for nearly every waking hour of my life since. No night passes when I don’t wake in a cold sweat thinking of those moments on that mountain. I’ll never get over it. I cannot get over it. The deciding vote was mine, and it will haunt me till they rest me in an East Texas grave.

Mikey nodded. “Okay,” he said, “I guess that’s two votes to one, Danny abstains. We gotta let ‘em go.”

I motioned for the three goatherds to get up, and signaled to them with my rifle to go on their way. They never gave one nod or smile of gratitude. And they surely knew we might very well have killed them. They turned toward the higher ground behind us.

I can see them now. They put their hands behind their backs in that peculiar Afghan way and broke into a very fast jog, up the steep gradient, the goats around us now trotting to join them.

I guess that’s when I woke up and stopped worrying about the goddamned American liberals. “This is bad,” I said. “This is real bad. What the fuck are we doing?”

Axe shook his head. Danny shrugged. Mikey, to be fair, looked as if he had seen a ghost. Like me, he was a man who knew a massive mistake had just been made. More chilling than anything we had ever done together. Where were those guys headed? Were we crazy or what?

By my watch, it was precisely nineteen minutes after their departure, and the mood of sheer gloom enveloped us all.

Right now we sensed we must remain in strictly defensive mode, lie low for a while and hope the Taliban had not been alerted or if they had that we would be too well hidden for them to locate us. We were excellent practitioners of lying low and hiding.

Nothing stirred in the village. It had now been more than an hour and a half since we turned the goatherds loose. And it was still quiet and peaceful, hardly a breath of wind. And by Christ it was hot.

Around ten minutes more passed. Suddenly I heard Mikey make a familiar alert sound….Sssst! Sssst! I lifted up my hat and instinctively looked left, over my portside quarter, to the spot where I knew Axe would be covering our flank. And he was right there, rigid, in firing position, his rifle aimed straight up the mountain.

I twisted around to look directly behind me. Mikey was staring wide-eyed up the hill, calling orders, instructing Danny to call in immediate backup from HQ if he could make the radio work. He saw I was on the case, looked hard at me, and pointed straight up the hill. Lined along the top were between eighty and a hundred heavily armed Taliban warriors, each one of them with an AK-47 pointing downward. Some were carrying rocket-propelled grenades.

My heart dropped directly into my stomach. And I cursed those fucking goatherds to hell, and myself for not executing them when every military codebook every written had taught me otherwise. Not to mention my own raging instincts, which had to me to go with Axe and execute them. And let the liberals all go to hell in a mule cart, and take them all of their fucking know-nothing rules of etiquette in war and human rights and whatever other bullshit makes ‘em happy. You want to charge us with murder? Well, fucking do it. But at least we’ll all be alive to answer it. This way really sucks.

And at that moment all hell broke loose. The Taliban unleashed an avalanche of gunfire at us, straight down the mountain at every angle.

I could hear Mikey shouting, “Danny, Danny for Christ’s sake, get that fucking thing working….Marcus, no options now, buddy, kill ‘em all!””

Excerpts from “Lone Survivor”,  pages 223 and 224:

“Al Qaeda are running around in broad daylight, mostly doing what the heck they want, until we show up and chase the little pricks back over the border to Pakistan. Where they stay. For about ten minutes, before launching their next foray into these tribal mountains, which their ancestors have ruled for centuries.

The Taliban is a ruthless outfit, with instincts about killing their enemies which have barely changed in two thousand years.

But from where I was sitting, in the smoky main room of one of Sabray’s high houses, talking to the village cop, that’s not the way the tide was running. And until the United States decides to wield a very large stick up here in support of the elected government of the people, in Kabul, I’m not looking for any serious real change real soon. The enemy is prepared to go to any lengths to achieve victory, terrorizing its own people, if necessary, and resorting to barbaric practices against its enemy, including decapitating people or butchering them.

We are not allowed to fight them on those terms. And neither would we wish to. However, we could fight in a much more ruthless manner, stop worrying if everyone still loved us. If we did that, we’d probably win in both Afghanistan and Iraq in about a week.

But we are not allowed to do that. And I guess we’d better start getting used to the consequences and permit the American liberals to squeak and squeal us to ultimate defeat. I believe that’s what it’s called when you pack up and go home, when a war fought under your own “civilized” terms is unwinnable.

We’re tougher, better trained, better organized, better armed, with access to weapons which cannot be resisted. The U.S. Armed Forces represent the greatest fighting force this world has ever seen, and we keep getting our butts kicked by a bunch of illegal thugs who ought to be eliminated.

Look at me, right now in my story. Helpless, tortured, shot, blown up, my best buddies all dead, and all because we were afraid of the liberals back home, afraid to do what was necessary to save our own lives. Afraid of American civilian lawyers. I have only one piece of advice for what it’s worth: if you don’t want to get into a war where things go wrong, where the wrong people sometimes get killed, where innocent people sometimes have to die, then stay the hell out of it in the first place.

Because that’s what happens. In all wars, down all the years of history. Terrible injustices, the killing of people who did not deserve to die. That’s what war is. And if you can’t cope with it, don’t do it.”