Strategic Errors of Monumental Proportions

What Can Be Done in Iraq? by Lt. Gen. William E. Odom (Ret.)

Text of testimony before the Senate Foreign Relations Committee, 18 January 2007

Good afternoon, Senator Biden, and members of the committee. It is a grave responsibility to testify before you today because the issue, the war in Iraq, is of such monumental importance.

You have asked me to address primarily the military aspects of the war. Although I shall comply, I must emphasize that it makes no sense to separate them from the political aspects. Military actions are merely the most extreme form of politics. If politics is the business of deciding "who gets what, when, how," as Boss Tweed of Tammany Hall in New York City once said, then the military aspects of war are the most extreme form of politics. The war in Iraq will answer that question there.

Strategic Overview

The role that US military forces can play in that conflict is seriously limited by all the political decisions the US government has already taken. The most fundamental decision was setting as its larger strategic purpose the stabilization of the region by building a democracy in Iraq and encouraging its spread. This, of course, was to risk destabilizing the region by starting a war.

Military operations must be judged by whether and how they contribute to accomplishing war aims. No clear view is possible of where we are today and where we are headed without constant focus on war aims and how they affect US interests. The interaction of interests, war aims, and military operations defines the strategic context in which we find ourselves. We cannot have the slightest understanding of the likely consequences of proposed changes in our war policy without relating them to the strategic context. Here are the four major realities that define that context:

1. Confusion about war aims and US interests. The president stated three war aims clearly and repeatedly:

* the destruction of Iraqi WMD;
* the overthrow of Saddam Hussein; and
* the creation of a liberal democratic Iraq.

The first war aim is moot because Iraq had no WMD. The second was achieved by late Spring 2003. Today, people are waking up to what was obvious before the war -- the third aim has no real prospects of being achieved even in ten or twenty years, much less in the short time anticipated by the war planners. Implicit in that aim was the belief that a pro-American, post-Saddam regime could be established. This too, it should now be clear, is most unlikely. Finally, is it in the US interest to have launched a war in pursuit of any of these aims? And is it in the US interest to continue pursuing the third? Or is it time to redefine our aims? And, concomitantly, to redefine what constitutes victory?

2. The war has served primarily the interests of Iran and al-Qaeda, not American interests.

We cannot reverse this outcome by more use of military force in Iraq. To try to do so would require siding with Sunni leaders and the Ba'athist insurgents against pro-Iranian Shi'ite groups. The Ba'athist insurgents constitute the forces most strongly opposed to Iraqi cooperation with Iran. At the same time, our democratization policy has installed Shi'ite majorities and pro-Iranian groups in power in Baghdad, especially in the ministries of interior and defense. Moreover, our counterinsurgency operations are, as unintended (but easily foreseeable) consequences, first, greater Shi'ite openness to Iranian influence and second, al-Qaeda's entry into Iraq and rooting itself in some elements of Iraqi society.

3. On the international level, the war has effectively paralyzed the United States militarily and strategically, denying it any prospect of revising its strategy toward an attainable goal.

As long as US forces remained engaged in Iraq, not only will the military costs go up, but also the incentives will decline for other states to cooperate with Washington to find a constructive outcome. This includes not only countries contiguous to Iraq but also Russia and key American allies in Europe. In their view, we deserve the pain we are suffering for our arrogance and unilateralism.

4. Overthrowing the Iraqi regime in 2003 insured that the country would fragment into at least three groups; Sunnis, Shi'ites, and Kurds. In other words, the invasion made it inevitable that a civil war would be required to create a new central government able to control all of Iraq. Yet a civil war does not insure it. No faction may win the struggle. A lengthy stalemate, or a permanent breakup of the country is possible. The invasion also insured that outside countries and groups would become involved. Al-Qaeda and Iran are the most conspicuous participants so far, Turkey and Syria less so. If some of the wealthy oil-producing countries on the Arabian Peninsula are not already involved, they are most likely to support with resources any force in Iraq that opposes Iranian influence.

Many critics argue that, had the invasion been done "right," such as sending in much larger forces for reestablishing security and government services, the war would have been a success. This argument is not convincing. Such actions might have delayed a civil war but could not have prevented it. Therefore, any military programs or operations having the aim of trying to reverse this reality, insisting that we can now "do it right," need to be treated with the deepest of suspicion. That includes the proposal to sponsor the breakup by creating three successor states. To do so would be to preside over the massive ethnic cleansing operations required for the successor states to be reasonably stable. Ethnic cleansing is happening in spite of the US military in Iraq, but I see no political or moral advantage for the United States to become its advocate. We are already being blamed as its facilitator.

Let me now turn to key aspects of the president's revised approach to the war, as well as several other proposals.

In addition to the president, a number of people and groups have supported increased US force levels. As General Colin Powell has said, before we consider sending additional US troops, we must examine what missions they will have. I would add that we ask precisely what those troops must do to reverse any of these four present realities created by the invasion. I cannot conceive of any achievable missions they could be given to cause a reversal.

Just for purposes of analysis, let us suppose we had unlimited numbers of US troops to deploy in Iraq. Would that change my assessment? In principle, if two or three million troops were deployed there with the latitude to annihilate all resistance without much attention to collateral civilian casualties and human rights, order might well be temporarily reestablished under a reign of US terror. The problem we would then face is that we would be opposed not only by 26 million Iraqis but also by millions of Arabs and Iranians surrounding Iraq, peoples angered by our treatment of Muslims and Arabs. These outsiders are already involved to some degree in the internal war in Iraq, and any increase of US forces is likely to be exceeded by additional outside support for insurgents.

I never cease to be amazed at our military commanders' apparent belief that the "order of battle" of the opposition forces they face are limited to Iraq. I say "apparent" because those commanders may be constrained by the administration's policies from correcting this mistaken view. Once the invasion began, Muslims in general and Arabs in particular could be expected to take sides against the United States. In other words, we went to war not just against the Iraqi forces and insurgent groups but also against a large part of the Arab world, scores and scores of millions. Most Arab governments, of course, are neutral or somewhat supportive, but their publics in growing numbers are against us.

It is a strategic error of monumental proportions to view the war as confined to Iraq. Yet this is the implicit assumption on which the president's new strategy is based. We have turned it into two wars that vastly exceed the borders of Iraq. First, there is the war against the US occupation that draws both sympathy and material support from other Arab countries. Second, there is the Shi'ite-Sunni war, a sectarian conflict heretofore sublimated within the Arab world but that now has opened the door to Iranian influence in Iraq. In turn, it foreordains an expanding Iranian-Arab regional conflict.

Any military proposals today that do not account for both larger wars, as well as the Iranian threat to the Arab states on the Persian Gulf, must be judged wholly inadequate if not counterproductive. Let me now turn to some specific proposals, those advocated by independent voices and the Iraq Study Group as well as the administration.

Specific Proposals

Standing up Iraqi security forces to replace US forces. Training the Iraqi military and police force has been proposed repeatedly as a way to bring stability to Iraq and allow US forces to withdraw. Recently, new variants, such as embedding US troops within Iraqi units, have been offered. The Iraq Study Group made much of this technique.

I know of no historical precedent to suggest that any of them will succeed. The problem is not the competency of Iraqi forces. It is political consolidation and gaining the troops' loyalties to the government and their commanders as opposed to their loyalties to sectarian leaders, clans, families, and relatives. For what political authority are Iraqi soldiers and police willing to risk their lives? To the American command? What if American forces depart? Won't they be called traitors for supporting the invaders and occupiers? Will they trust in a Shi'ite-dominated government and ministry of interior, which is engaged in assassinations of Sunnis? Sunni Arabs and Kurds would be foolish to do so, although financial desperation has driven many to risk it. What about to the leaders of independent militias? Here soldiers can find strong reasons for loyal service: to defend their fellow sectarians, families, and relatives. And that is why the government cannot disband them. It has insufficient loyal troops to do so.

As a military planner working on the pacification programs in 1970-71 in Vietnam, I had the chance to judge the results of training both regular South Vietnamese forces and so-called "regional" and "popular" forces. Some were technically proficient, but that did not ensure that they would always fight for the government in Saigon. Nor were they always loyal to their commanders. And they occasionally fought each other when bribed by Viet Cong agents to do so. The "popular forces" at the village level often failed to protect their villages. The reasons varied, but in several cases it was the result of how their salaries were funded. Local tax money was not the source of their pay; rather it was US-supplied funds. Thus these troops, as well as "regional forces," had little sense of obligation to protect villagers in their areas of responsibility. For anyone who doubts that the Vietnam case is instructive for understanding the Iraqi case, I recommend Ahmed S. Hashim's recent book, Insurgency and Counterinsurgency in Iraq. A fluent Arab linguist and a reserve US Army colonel, who has served a year in Iraq and visited it several other times, Hashim offers a textured study that struck me again and again as a rerun of an old movie, especially where it concerned US training of Iraqi forces.

US military assistance training in El Salvador is often cited as a successful case. In fact, this effort amounted to letting the old elites, who used death squads to impose order, come back to power in different guises. And death squads are again active there. The real cause of the defeat of the Salvadoran insurgency was Gorbachev's decision to cut off supplies to it, as he promised President George H. Bush at the Malta summit meeting. Thus denied their resource base, and having failed to create a self-supporting tax regime in the countryside as the Viet Cong did in Vietnam, they could not survive for long. Does the administration's new plan for Iraq promise to eliminate all outside support to the warring factions? Is it even remotely possible? Hardly.

The oft-cited British success in Malaysia is only superficially relevant to the Iraq case. British officials actually ruled the country. Thus they had decades of firsthand knowledge of the local politics. They made such a mess of it, however, that an insurgency emerged in opposition. A new military commander and a cleanup of the colonial administration provided political consolidation and the isolation of the communist insurgents, mostly members of an ethnic minority group. This pattern would be impossible to duplicate in Iraq.

An infusion of new funds for reconstruction. A shortage of funds has not been the cause of failed reconstruction efforts in Iraq. Administrative capacity to use funds effectively was and remains the primary obstacle. Even support programs carried out by American contractors for US forces have yielded mixed results. Insurgent attacks on the projects have provoked transfers of construction funds to security measures, which have also failed.

A weak or nonexistent government administrative capacity allows most of the money to be squandered. Putting another billion or so dollars into public works in Iraq today – before a government is in place with an effective administrative capacity to penetrate to the neighborhood and village level – is like trying to build a roof on a house before its walls have been erected. Moreover, a large part of that money will find its way into the hands of insurgents and sectarian militias. That is exactly what happened in Vietnam, and it has been happening in Iraq.

New and innovative counterinsurgency tactics. The cottage industry of counterinsurgency tactics is old and deceptive. When the US military has been periodically tasked to reinvent them – the last great surge in that industry was at the JFK School in Fort Bragg in the 1960's – it has no choice but to pretend that counterinsurgency tactics can succeed where no political consolidation in the government has yet been achieved. New counterinsurgency tactics cannot save Iraq today because they are designed without account for the essence of any "internal war," whether an insurgency or a civil war.

Such wars are about "who will rule," and who will rule depends on "who can tax" and build an effective state apparatus down to the village level.

The taxation issue is not even on the agenda of US programs for Iraq. Nor was it a central focus in Vietnam, El Salvador, the Philippines, and most other cases of US-backed governments embroiled in internal wars. Where US funding has been amply provided to those governments, the recipient regime has treated those monies as its tax base while failing to create an indigenous tax base. In my own study of three counterinsurgency cases, and from my experience in Vietnam, I discovered that the regimes that received the least US direct fiscal support had the most success against the insurgents. Providing funding and forces to give an embattled regime more "time" to gain adequate strength is like asking a drunk to drink more whiskey in order to sober up.

Saddam's regime lived mostly on revenues from oil exports. Thus it never had to create an effective apparatus to collect direct taxes. Were US forces and counterinsurgency efforts to succeed in imposing order for a time, the issue of who will control the oil in Iraq would become the focus of conflict for competing factions. The time would not be spent creating the administrative capacity to keep order and to collect sufficient taxes to administer the country. At best, the war over who will eventually rule country would only be postponed.

This is the crux of the dilemma facing all such internal wars. I make this assertion not only based on my own study, but also in light of considerable literature that demonstrates that the single best index of the strength of any state is its ability to collect direct taxes, not export-import tax or indirect taxes. The latter two are relatively easy to collect by comparison, requiring much weaker state institutions.

The Iraq Study Group. The report of this group should not be taken as offering a new or promising strategy for dealing with Iraq. Its virtue lies in its candid assessment of the realities in Iraq. Its great service has been to undercut the misleading assessments, claims, and judgment by the administration. It allows the several skeptical Republican members of the Congress to speak out more candidly on the war, and it makes it less easy for those Democrats who were heretofore supporters of the administration's war to refuse to reconsider.

If one reads the ISG report in light of the four points in the strategic overview above, one sees the key weakness of its proposals. It does not concede that the war, as it was conceived and continues to be fought, is not "winnable." It rejects the rapid withdrawal of US forces as unacceptable. No doubt a withdrawal will leave a terrible aftermath in Iraq, but we cannot avoid that. We can only make it worse by waiting until we are forced to withdraw. In the meantime, we prevent ourselves from escaping the paralysis imposed on us by the war, unable to redefine our war aims, which have served Iranian and al-Qaeda interests instead of our own.

I do not criticize the report for this failure. As constructed, the group could not advance a fundamental revision of our strategy. Its Republican and Democrat members could not be said to represent all members of their own parties. Thus the most it could do was to make it politically easier for the administration to begin a fundamental revision of its strategy instead of offering a list of tactical changes for the same old war aim of creating a liberal democracy with a pro-American orientation in Iraq.

What Would a Revised Strategy Look Like?

How can the United States recover from this strategic blunder?

It cannot as long as fails to revise its war aims. Wise leaders in war have many times admitted that their war aims are misguided and then revised them to deal with realities beyond their control. Such leaders make tactical withdrawals, regroup, and revise their aims, and design new strategies to pursue them. Those who cannot make such adjustments eventually face defeat.

What war aim today is genuinely in the US interest and offers realistic prospects of success? And not just in Iraq but in the larger region?

Since the 1950's, the US aim in this region has been "regional stability" above all others. The strategy for achieving this aim of every administration until the present one has been maintaining a regional balance of power among three regional forces – Arabs, Israelis, and Iranians. The Arab-Persian conflict is older than the Arab-Israeli conflict. The United States kept a diplomatic foothold in all three camps until the fall of the shah's regime in Iran. Losing its footing in Tehran, it began under President Carter's leadership to compensate by building what he called the Persian Gulf Security Framework. The US Central Command with enhanced military power was born as one of the main means for this purpose, but the long-term goal was a rapprochement. Until that time, the military costs for maintaining the regional power balance would be much higher.

The Reagan Administration, although it condemned Carter's Persian Gulf Security Framework, the so-called "Carter Doctrine," continued Carter's policies, even to the point of supporting Iraq when Iran was close to overrunning it. Some of its efforts to improve relations with Iran were feckless and counterproductive, but it maintained the proper strategic aim – regional stability.

The Bush Administration has broken with this strategy by invading Iraq and also by threatening the existence of the regime in Iran. It presumed that establishing a liberal democracy in Iraq would lead to regional stability. In fact, the policy of spreading democracy by force of arms has become the main source of regional instability.

This not only postponed any near-term chance of better relations with Iran, but also has moved the United States closer to losing its footing in the Arab camp as well. That, of course, increases greatly the threats to Israel's security, the very thing it was supposed to improve, not to mention that it makes the military costs rise dramatically, exceeding what we can prudently bear, especially without the support of our European allies and others.

Several critics of the administration show an appreciation of the requirement to regain our allies and others' support, but they do not recognize that withdrawal of US forces from Iraq is the sine qua non for achieving their cooperation. It will be forthcoming once that withdrawal begins and looks irreversible. They will then realize that they can no longer sit on the sidelines. The aftermath will be worse for them than for the United States, and they know that without US participation and leadership, they alone cannot restore regional stability. Until we understand this critical point, we cannot design a strategy that can achieve what we can legitimately call a victory.

Any new strategy that does realistically promise to achieve regional stability at a cost we can prudently bear, and does not regain the confidence and support of our allies, is doomed to failure. To date, I have seen no awareness that any political leader in this country has gone beyond tactical proposals to offer a different strategic approach to limiting the damage in a war that is turning out to be the greatest strategic disaster in our history.

Bush Must Go by Paul Craig Roberts

When are the American people and their representatives in Congress and the military going to wake up and realize that the US has an insane war criminal in the White House who is destroying all chances for peace in the world and establishing a police state in the US?

Americans don’t have much time to realize this and to act before it is too late. Bush’s “surge” speech last Wednesday night makes it completely clear that his real purpose is to start wars with Iran and Syria before failure in Iraq brings an end to the neoconservative/Israeli plan to establish hegemony over the Middle East.

The “surge” gives Congress, the media, and the foreign policy establishment something to debate and oppose, while Bush sets his plans in motion to orchestrate a war with Iran. Suddenly, we are hearing Bush regime propaganda that there are Iranian networks operating within Iraq that are working with the Iraqi insurgency and killing US troops.

This assertion is a lie and preposterous on its face. Iranian Shi’ites are not going to arm Iraqi Sunnis, who are more focused on killing Iraqi Shi’ites allied with Iran than on killing US troops. If the Iranians wanted to cause the US trouble in Iraq, they would encourage Iraqi Shi’ites to join the insurgency against US forces. An insurgency drawn from 80 per cent of the Iraqi population would overwhelm the US forces.

CBS reports that the news organization has been told by US officials “that American forces have begun an aggressive and mostly secret ground campaign against networks of Iranians that had been operating with virtual impunity inside Iraq.” To manufacture evidence in behalf of this lie to feed to the gullible American public, US forces invaded an Iranian consulate in northern Iraq and kidnapped five consulate officials, claiming the Iranians were part of plans “to kill Americans.” In typical Orwellian fashion, Secretary of State Condi Rice described Bush’s aggression against Iran as designed to confront Tehran’s aggression.

Iraqi government officials in the Kurdish province and the Iraqi foreign minister have refused to go along with Bush’s propaganda ploy. Iraqi Foreign Minister Hoshyar Zebari announced that the Iranian officials were no threat and were working in a liaison office that had Iraqi government approval and was in the process of being elevated into a consulate.

The Iraqi foreign minister said that US troops tried to seize more innocent people at the Irbil airport but were prevented by Kurdish troops.

The Kurds, of course, have been allies of the US forces, but Bush is willing to alienate the Kurds in the interest of provoking a war with Iran.

If Bush is unable to orchestrate war with Iran directly, he will orchestrate war indirectly by having US troops attack Iraqi Shi’ite militias. Bush has already given orders for US troops to attack the Iraqi Shi’ite militias, who oppose the Sunnis and have not been part of the insurgency. Obviously, once Bush can get US troops in open warfare with Iraqi Shi’ites, the situation for US troops in Iraq will quickly go down hill. Bush will be able to blame Iranian Shi’ites for arming Iraqi Shi’ites that he can say are killing US troops.

Bush has also ordered the Persian Gulf to be congested with TWO US aircraft carrier attack groups. There is no military or diplomatic reason for even one attack group to be in the Persian Gulf. If Bush fails to orchestrate a war with Iran by kidnapping its officials or by attacking Shi’ite militias, he can orchestrate an event like the Tonkin Gulf incident or have the Israelis pull another USS Liberty incident and blame the Iranians.

The Tonkin Gulf incident was used by the Johnson administration to deceive Congress and to involve the US in the Vietnam war. Johnson alleged a North Vietnamese attack on US warships.

In 1967 Israel attacked and destroyed the US intelligence ship Liberty, because Liberty’s crew had picked up proof that Israel had initiated the war with Egypt and intended to attack Syria the next day. Some have speculated that Israelis hoped their attack on the Liberty could be blamed on Egypt and used to draw the US into the war against Egypt.

In 2003 the Moorer Commission, headed by Admiral Tom Moorer, former Chief of Naval Operations and former Chairman of the Joint Chiefs, concluded:

“That in attacking the USS Liberty, Israel committed acts of murder against American servicemen and an act of war against the United States.”

“That fearing conflict with Israel, the White House deliberately prevented the U.S. Navy from coming to the defense of USS Liberty.”

“The Captain and surviving crew members were later threatened with court-martial, imprisonment or worse if they exposed the truth; and were abandoned by their own government.”

“That due to the influence of Israel’s powerful supporters in the United States, the White House deliberately covered up the facts of this attack from the American people.”

“That a danger to our national security exists whenever our elected officials are willing to subordinate American interests to those of any foreign nation, and specifically are unwilling to challenge Israel’s interests when they conflict with American interests.”

On the 30th anniversary of Israel’s destruction of the liberty, Admiral Moorer said that Israel attacked the Liberty because Israel knew that the intelligence ship could intercept Israel’s plans to seize the Golan Heights from Syria, an act of Israeli aggression to which the US government was opposed. Admiral Moorer said, “I believe Moshe Dayan concluded that he could prevent Washington from becoming aware of what Israel was up to by destroying the primary source of acquiring that information--the US Liberty. Moorer reports that after a 25 minute air attack “that pounded the Liberty with bombs, rockets, napalm and machine gun fire . . . three Israeli torpedo boats closed in for the kill . . . the torpedo boats’ machine guns also were turned on life rafts that were deployed into the Mediterranean as well as those few on deck that had escaped damage.”

Admiral Moorer says, “What is so chilling and cold-blooded, of course, is that they [Israel] could kill as many Americans as they did in confidence that Washington would cooperate in quelling any public outcry.” The US invasion of Iraq and the looming US attack on Iran are proof that Israel has even more power over the White House today.

Bush has many ways to widen his war in the Middle East. His brutal aggression against Somalia has largely escaped criticism for the war crime that it is. On January 11 the US National Intelligence Director told Congress that Hezbollah in Lebanon may be the next US threat. Just as he lied to the entire world about Saddam Hussein and Iraq, Bush is lying about Iran. Bush and the neoconservatives are frantic for war with Iran to get underway before the US Congress forces a US withdrawal from the failed adventure in Iraq.

Bush’s entire “war on terror” is based on lies. The Bush Regime, desperate to keep its lies covered up, is now trying to prevent American law firms from defending the Guantanamo detainees. The Bush Regime is fearful that Americans will learn that the detainees are not terrorists but props in the regime’s orchestrated “terror war.”

On January 13 a New York Times (editorial) said that “Cully Stimson, the deputy assistant secretary of defense for detainee affairs, tried to rally American corporations to stop doing business with law firms that represent inmates of the Guantanamo internment camp.” Stimson alleged that it was “shocking” that American law firms were “representing detainees down there.” He suggested that when corporate America got word of if, “those C.E.O.’s are going to make those law firms choose between representing terrorists or representing reputable firms. We want to watch that play out.”

The only reason for the Bush Regime’s policy of indefinite detention without charges is that it has no charges to bring. The detainees are not terrorists. They are the Bush Regime’s props in a fake war that serves as cover for the Regime’s hegemonic policy in the Middle East.

The only action that can stop Bush is for both the Democratic and Republican leadership of the House and Senate to call on the White House, tell Bush they know what he is up to and that they will not fall for it a second time. The congressional leadership must tell Bush that if he does not immediately desist, he will be impeached and convicted before the week is out. Can a congressional leadership that lives in fear of the Israel Lobby perform this task?

All the rest is penny-ante. Revoking the Iraqi War Resolution as Rep. Sam Farr has proposed or requiring Bush to obtain congressional authorization prior to any US attack on Iran simply lets Bush and his Federalist Society apologists for executive dictatorship claim he has commander-in-chief powers and proceed with his planned aggression. Cutting off funding is not itself enough as Bush can raid other budgets. Non-binding resolutions of disapproval are meaningless to a president who doesn’t care what anyone else thinks.

Nothing can stop the criminal Bush from instituting wider war in the Middle East that could become a catastrophic world war except an unequivocal statement from Congress that he will be impeached.

Bush has made the US into a colony of Israel. The US is incurring massive debt and loss of both life and reputation in order to silence Muslim opposition to Israel’s theft of Palestine and the Golan Heights. That is what the “war on terror” is about.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: paulcraigroberts@yahoo.com

What Bush Really Said By PAUL CRAIG ROBERTS

Bush's "surge" speech is a hoax, but members of Congress and media commentators are discussing the surge as if it were real.

I invite the reader to examine the speech. The "surge" content consists of nonsensical propagandistic statements. The real content of the speech is toward the end where Bush mentions Iran and Syria.

Bush makes it clear that success in Iraq does not depend on the surge. Rather, "Succeeding in Iraq . . . begins with addressing Iran and Syria."

Bush asserts that "these two regimes are allowing terrorists and insurgents to use their territory to move in and out of Iraq. Iran is providing material support for attacks on American troops."

Bush's assertions are propagandistic lies.

The Iraq insurgency is Sunni. Iran is Shi'ite. If Iran is supporting anyone in Iraq it is the Shi'ites, who have not been part of the insurgency. Indeed, the Sunni and Shi'ites are engaged in a civil war within Iraq.

Does any intelligent person really believe that Iranian Shi'ites are going to arm Iraqi Sunnis who are killing Iraqi Shi'ites allied with Iran? Does anyone really believe that Iranian Shi'ites are going to provide sanctuary for Iraqi Sunnis?

Bush can tell blatant propagandistic lies, because Congress and the American people don't know enough facts to realize the absurdity of Bush's assertions.

Why is Bush telling these lies? Here is the answer: Bush says, "We will disrupt the attacks on our forces. We will interrupt the flow of support from Iran and Syria. And we will seek out and destroy the networks providing advanced weaponry and training to our enemies in Iraq."

In those words, Bush states perfectly clearly that victory in Iraq requires US forces to attack Iran and Syria. Moreover, Bush says, "We are also taking other steps to bolster the security of Iraq and protect American interests in the Middle East. I recently ordered the deployment of an additional carrier strike group to the region."

What do two US aircraft carrier attack groups in the Persian Gulf have to do with a guerilla ground war in Iraq?

The "surge" is merely a tactic to buy time while war with Iran and Syria can be orchestrated. The neoconservative/Israeli cabal feared that the pressure that Congress, the public, and the American foreign policy establishment were putting on Bush to de-escalate in Iraq would terminate their plan to achieve hegemony in the Middle East.
Failure in Iraq would mean the end of the neoconservatives' influence. It would be impossible to start a new war with Iran after losing the war in Iraq.

The neoconservatives and the right-wing Israeli government have clearly stated their plans to overthrow Muslim governments throughout the region and to deracinate Islam. These plans existed long before 9/11.

Near the end of his "surge" speech, Bush adopts the neoconservative program as US policy. The struggle, Bush says, echoing the neoconservatives and the Israeli right-wing, goes far beyond Iraq. "The challenge," Bush says, is "playing out across the broader Middle East. . . . It is the decisive ideological struggle of our time."
America is pitted against "extremists" who "have declared their intention to destroy our way of life." "The most realistic way to protect the American people," Bush says, is "by advancing liberty across a troubled region."

This, of course, is a massive duplicitous lie. We have brought no liberty to Iraq, but we have destroyed their way of life. Bush suggests that Muslims in Afghanistan, Lebanon and Palestine are waiting and hoping for more invasions to free them of violence. Did Bush's invasion free Iraq from violence or did it bring violence to Iraq?

It is extraordinary that anyone can listen to this blatant declaration of US aggression in the Middle East without demanding Bush's immediate impeachment.

Republican US Senator Chuck Hagel declared Bush's plan to be "the most dangerous foreign policy blunder in this country since Vietnam." In truth, it is far worse. It is naked aggression justified by transparent lies. No one has ever heard governments in Iraq, Syria, or Iran declare "their intention to destroy our way of life." To the contrary, it is the United States and Israel that are trying to destroy the Muslim way of life.

The crystal clear truth is that fanatical neoconservatives and Israelis are using Bush to commit the United States to a catastrophic course.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

Who Rules America? by James Petras

In the broadest and deepest sense, understanding how the US political system functions, the decisions of war and peace are taken, who gets what, how and why, requires that we address the question of ‘Who rules America?’ In tackling the question of ‘ruling’ one needs to clarify a great deal of misunderstandings, particularly the confusion between those who make governmental decisions and the socio-economic institutional parameters which define the interests to be served. ‘Ruling’ is exacting: it defines the ‘rules’ to be followed by the political and administrative decision-makers in formulating budgetary expenditures, taxes, labor and social legislation, trade policy, military and strategic questions of war and peace. The ‘rules’ are established, modified and adjusted according to the specific composition of the leading sectors of a ruling class (RC). Rules change with shifts in power within the ruling class. Shifts in power can reflect the internal dynamics of an economy or the changing position of economic sectors in the world economy, particularly the rise and decline of economic competitors.

The ‘rules’ imposed by one economic sector of the RC at a time of favorable conditions in the world economy, will be altered as new dominant economic sectors emerge and unfavorable external conditions weaken the former dominant economic sectors. As we shall describe below the relative and absolute decline of the US manufacturing sector is directly related to the rise of a multidimensional ‘financial sector’ and to the greater competitiveness of other manufacturing countries. The result is an accelerating process of liberalization of the economy favored by the ascending financial sectors. Liberalization in pursuit of unregulated flows of investments, buyouts, acquisitions and trade increases the financial sector’s profits, commissions, incomes and bonuses. Liberalization facilitates the financial sector’s acquisition of assets. The declining competitiveness of the older ruling class manufacturing sector dependent on statist protectionism and subsidies leads to ‘rear-guard’ policies, attempting to fashion an unwieldy policy of liberalization abroad and protectionism at home.

The answer to the question of who rules depends on specifying the historical moment and place on the world economy. The answer is complicated by the fact that shifts among ‘sectors’ of the ruling class involves a prolonged ‘transitional period’. During this period declining and ascending sectors may intermingle and the class members of declining sectors ‘convert’ to the rising sector. Hence while power between economic sectors may change, the leading class groupings may not lose out or decline. They merely shift their investments and adapt to the new and more lucrative opportunities created by the ascending sector.

For example, while US manufacturing sector has declined relative to ‘finance capital’, many of the major investment institutions have shifted to the new financial ‘growth sectors.’ Concomitantly, the converted sectors of the ruling class will shift their policies toward greater liberalization and deregulation, thus severely weakening the rear-guard demands of the uncompetitive manufacturing sector. Equally important within the declining economic sectors of the RC, drastic structural changes may ensue, to regain profitable returns and retain influence and power. Foremost of these changes is relocation of production overseas to low wage, low tax, non-union locations, the introduction of IT technology designed to reduce labor costs and increase productivity, and diversification of economic activity to incorporate lucrative financial ‘services’.

For example General Electric has moved from manufacturing toward financial services, relocated labor intensive activity off-shore and computerized operations. Through these moves the distinction between ‘manufacturing’ and financial capital has been made obsolete in describing the ‘ruling class’.

To the degree that older manufacturing capitalists retain any economic and political weight in the RC, they have done so via sub-contracting overseas to Asia and Mexico (General Motors/Ford), invested in overseas plants to capture foreign markets, or have been converted in large part into commercial and importing operations (shoes, textiles, toys, electronics and computer chips).

Locally based manufacturers which remain in the RC are largely found among military contractors living off the largesse of state spending and depending on the political support of congressional and trade union officials, eager to secure employment for a shrinking manufacturing labor force.

During this transitional period of rapid and all-encompassing changes in the ruling class, enormous financial opportunities have opened up throughout the world. As a result of political tensions within the ‘governing class’, key policymakers are drawn directly from the most representative institutions of Wall Street. Key economic policies, especially those which are most relevant to the RC, tend to be overwhelmingly in the hands of tried and experienced top leaders from Wall Street.

Despite (or because of) the ascendancy of various sectors of financial capital in the RC, and their agreements on a host of ‘liberalizing’ economic policies, they are not homogeneous in all of their political outlooks, party affiliations, or their foreign policy outlook. Most of these political differences are questions of small matter – except on one issue where there is a major and growing rift, namely in the Middle East. A sector of the RC strongly aligned with the state of Israel supports a bellicose policy toward the Jewish state’s adversaries (Iran, Syria, Hezbollah and Palestine) as opposed to another sector of the RC favoring a diplomatic approach, directed toward securing closer ties with Arab and Persian elites. Given the highly militarized turn in US foreign policy (largely due to the ascendancy of neo-conservative ideologues, the strong influence of the Zionist Lobby, and the instability and failures of their policies in the Middle East and China) the RC has pressed for and secured direct control over foreign economic policy.

The tensions and conflicts within the RC – especially between the Zioncons and the ‘free marketeers’ – have been papered over by the enormous economic benefits accruing to all sectors. All RC financial sectors have been enriched by White House and Congressional policies. All have benefited from the ascendancy of ‘liberalizing regimes’ throughout the world. They have reaped the gains of the expansionary phase of the international economy. While the entire ruling financial, real estate and trading sectors have been the main beneficiaries, it has been the financial groups, particularly the investment banks that have led the way and provide the political leadership.

Ascendancy of Financial Capital

‘Finance capital’ has many faces and cannot be understood without reference to specific sectors. Investment banks, pension funds, hedge funds, savings and loan banks, investment funds are only a few of the operative managers of a multi-trillion dollar economy. Moreover each of these sectors have specialized departments engaged in particular types of speculative-financial activity including commodity and currency, trading, consulting and managing acquisition and mergers. Despite a few exposés, court cases, fines and an occasional jailing, the financial sector writes its rules, controls its regulators and has secured license to speculate on everything, everywhere and all the time. They have created the framework or universe in which all other economic activities (manufacturing, retail sales and real estate) take place.

‘Finance capital’ is not an isolated sector and cannot be counterposed to the ‘productive economy’ except in the most marginal ‘local activity’. In large part finance capital interacts with and is the essential driving force in real estate speculation, agro-business, commodity production and manufacturing activity. To a large degree ‘market prices’ are as influenced by speculative intervention as they are by ‘supply and demand’. Equally important, the entire architecture of the ‘paper empire’ (the entire complex of inter-related financial investments) is ultimately dependent on the production of goods and services. The structure of power and wealth takes the form of an inverted triangle in which a vast army of workers, peasants and salary employees produce value which becomes the basis for near and remote, simple and exotic, lucrative and speculative financial instruments. The transfer of value from the productive activities of labor up through the ladder and branches of financial instruments is carried out through various vehicles: direct financial ownership of enterprises, credit, debt leveraging, buyouts and mergers. The tendency of ‘productive capitalists’ is to start-up an enterprise, innovate, exploit labor, capture markets and then ‘sell-out’ or go ‘public’ (stock offerings). The financial sector acts as combined intermediary, manager, proxy-purchaser and consultant, capturing substantial fees and expanding their economic empires and… preparing the way to higher levels of acquisitions and mergers… ‘Finance capital’ is the midwife of the concentration and centralization of wealth and capital as well as the direct owner of the means of production and distribution. From exacting a larger and larger ‘tribute’ or ‘rent’ (commission or fee) on each large-scale capital transaction, ‘finance capital’ has moved toward penetrating and controlling an enormous array of economic activities, transferring capital across national and sectoral boundaries, extracting profits and dumping shares according to the business, product and profit cycle.

Within the ruling class, the financial elite is the most parasitical component and exceeds the corporate bosses (CEOs) and most entrepreneurs in wealth and annual payments. It falls short of the annual income and assets of the super-rich entrepreneurs like William Gates and Michael Dell.

The financial ruling class is internally stratified into three sub-groups: at the top are big private equity bankers and hedge-fund managers, followed by the Wall Street chief executives, who in turn are above the next rung of senior associate or vice-presidents of a big private equity funds who is followed by their counterparts at Wall Street’s public equity funds. Top hedge fund managers and executive have made $1 billion dollars or more a year – several times what the CEO’s make at publicly traded investment houses. For example in 2006 Lloyd Blankfein, CEO of Goldman Sachs, was paid $53.4 million, while Dan Ochs, executive of the hedge fund Och-Ziff Capital paid himself $220 million dollars. That same year the Morgan Stanley CEO received $40 million dollars, while the chief executive of the hedge fund Citadel was paid over $300 million dollars.

While the ‘hedge fund’ speculators receive the highest annual salaries, the private equity executives can equal their hundreds of millions payments through deal fees and special dividend payments from portfolio companies. This was especially true in 2006 when buyouts reached a record $710 billion dollars. The big bucks for the private equity bosses comes from the accumulating stake executives have in portfolio companies. They typically skim 20% of profits, which are realized when a group sells or lists a portfolio company. At that time, the payday runs into the hundreds of millions of dollars.

The subset of the financial ruling class is the ‘junior bankers’ of private equity firms who take about $500,000 a year. At the bottom rung are the ‘junior bankers’ of publicly traded investment houses (‘Wall Street’) who average $350,000 a year. The financial ruling class is made up of these multi-billionaire elites from the hedge funds, private and public equity bankers and their associates in big prestigious corporate legal and accounting firms. They in turn are linked to the judicial and regulatory authorities, through political appointments and contributions, and by their central position in the national economy.

Within the financial ruling class, political leadership does not usually come from the richest hedge fund speculators, even less among the ‘junior bankers’. Political leaders come from the public and private equity banks, namely Wall Street - especially Goldman Sachs, Blackstone, the Carlyle Group and others. They organize and fund both major parties and their electoral campaigns. They pressure, negotiate and draw up the most comprehensive and favorable legislation on global strategies (liberalization and deregulation) and sectoral policies (reductions in taxes, government pressure on countries like China to ‘open’ their financial services to foreign penetration and so on). They pressure the government to ‘bailout’ bankrupt and failed speculative firms and to balance the budget by lowering social expenditures instead of raising taxes on speculative ‘windfall’ profits.

The Dance of the Billions: Finance Capital Reaps the Profits from their Power

Speculators of the world had a spectacular year in 2006 as global equities hit double digit gains in the US, European and Asian markets. China, Brazil, Russia and India were centers of speculative profiteering as the China FTSE index rose 94%, Russia’s stock market rose 60%, Brazil’s Bovespa was up 32.9% and India’s Sensex climbed 46.7%. In large part the stock markets rose because of cheap credit (to speculate), strong liquidity (huge financial, petrol and commodity profits and rents) and so-called ‘reforms’ which gave foreign investors greater access to markets in China, India and Brazil. The biggest profits in stock market speculation occurred under putative ‘center-left’ regimes (Brazil and India) and ‘Communist’ China, which have realigned themselves with the most retrograde and ‘leading’ sectors of their financial ruling class.

Russia’s booming stock market reflects a different process involving the re-nationalization of gas and petroleum sectors, at the expense of the gangster-oligarchs of the Yeltsin era and the ‘give-away’ contracts to European/US oil and gas companies (Shell, Texaco). As a result huge windfall profits have been re-cycled internally among the new Putin era millionaires who have been engaged in conspicuous consumption, speculation and investment in joint ventures with foreign manufacturers in transport and energy related industries.

The shift toward foreign-controlled speculative capital emerging in China, India and Brazil as opposed to ‘national and state’ funded investment in Russia accounts for the irrational and vitriolic hostility exhibited by the western financial press to President Putin.

One of the major sources of profit-making is in the area of ‘mergers and acquisitions’ (M&A) – the buying and selling of multinational conglomerates, with $3,900 billion in deals for 2006. Investment banks took $18.8 billion dollars in ‘fees’ leading to multi-million dollar bonuses for ‘M&A’ bankers. M&A, hostile or benign, are largely speculative activity fueled by cheap debt and leading to the greater concentration of ownership and profits. Today it is said 2% of the households own 80% of the world’s assets. Within this small elite, a fraction embedded in financial capital owns and controls the bulk of the world’s assets and organizes and facilitates further concentration of conglomerates. The value of speculative M&A on a world scale is 16% higher than at the height of the ‘DOTCOM’ speculative boom in 2000. In the US alone over $400 billion dollars worth of private equity deals were struck in 2005, three times higher than the previous year.

To understand who are the leading members of the financial ruling class one needs only to look at the ten leading private equity banks and the value and number of M&A deals in which they were engaged:

Private equity rankings by M&A deals (Year to Dec 20 2006)

Private equity rankings by M&A deals (Year to Dec 20 2006)

US Value $bn Number

Blackstone 85.3 12

Texas Pacific 81.9 11

Bain Capital Partners 74.7 9

Thomas H Lee Partners 53.4 6

Goldman Sachs 51.2 5

Carlyle 50.0 14

Apollo Management 44.9 7

Kohlberg Kravis Roberts 44.5 3

Merrill Lynch 35.9 3

Cerberus Capital Management 28.6 4

Industry Total 402.6 1,157

(Financial Times 12/27/2006 p 13 - FT montage:Bob Haslett

The crucial fact is that these private equity banks are involved in every sector of the economy, in every region of the world economy and increasingly speculate in the conglomerates which are acquired.

In the era of the ascendancy of speculative finance capital it is not surprising that the three leading investment banks, Goldman Sachs, Lehman Brothers and Bear Stearns reported record annual profits, based on their expansion in Europe and Asia, and their transfer of profits from manufacturing and services to the financial sector. For the year 2006, Goldman Sachs (GS) recorded the most profitable year ever for a Wall Street investment bank, on the basis of big (speculative) ‘trading gains and lucrative investment in the world’s worst sweatshops in Asia. GS reported a 69% jump in annual earnings to $9.54 billion dollars. Lehman Brothers (LB) and Bear Stearns (BS) equity banks also recorded record earnings. LB earned a record $4billion for the year. SB earned a record $2.1 billion dollars. For the year Lehman set aside about $334,000 dollars per junior banker, while top speculators and bankers earned a big multiple of that amount.

For the year 2006 investment banking revenue reached nearly $38 billion dollars compared to $25 billion dollars in 2004 – an increase of 34% (Financial Times Dec. 13, 2006 p.15).

The dominance of finance capital has been nurtured by the speculative activity of the controllers and directors of state-owned companies. ‘State’ ownership is an ambiguous term since it raises a further more precise question: ‘Who owns the state’? In the Middle East there are seven state-owned oil and gas companies. In six of those companies the principal beneficiaries are a small ruling elite. They recycle their revenues and profits through US and EU investment banks largely into bonds, real estate and other speculative financial instruments (FT Dec 15, 2006 p.11). State ownership and speculative capital, in the context of closed ‘Gulf-State’ type of ruling classes, are complementary, not contradictory, activities. The ruling regime in Dubai converts oil rents into building a regional financial center. Many Jewish-American-led Wall Street investment banks cohabitate with new Islamic-based investment houses, both reaping speculative returns.

Much of the investment funds now in the hands of US investment banks, hedge funds and other sectors of the financial ruling class originated in profits extracted from workers in the manufacturing and service sector. Two inter-related processes led to the growth and dominance of finance capital: the transfer of capital and profits from the ‘productive’ to the financial and speculative sector and the transfer of finance capital overseas, in the form of take-over of foreign assets now equivalent of around 80% of the US GDP. The roots of finance capital are embedded in three types of intensified exploitation: 1) of labor (via extended hours, transfer of pension and health costs from capital to labor, frozen minimum wage, stagnant and declining real wages and salaries); 2) of manufacturing profits (through higher rents, inter-sectoral transfers to financial instruments, interest payments and fees and commissions for mergers and acquisitions); and 3) via state fiscal policies by lowering capital gains taxes, increasing tax write-offs and tax incentives for overseas investments and imposing regressive local, state and federal taxes.

The result is increasing inequality between, on the one hand, senior and junior bankers, public, private equity, investment and hedge fund directors, and their entourage of lawyers, accountants and, on the other hand, wage and salaried workers. Income ratios range between 400 to 1 and 1,000 to 1, between the ruling class and median wage and salary workers is the norm.

Crisis of the Working and Middle Class – (Begin to Worry the Ruling Class)

Living standards for the working and middle class and the urban poor have declined substantially over the past thirty years (1978-2006) to a point where one can point to a burgeoning crises. While real hourly wages in constant 2005 dollars have stagnated, health, pension, energy and educational costs (increasingly borne by wage and salary workers) have skyrocketed. If extensions in work time and intensification of work place production (increases in productivity) are included in the equation, it is clear that living (including working) conditions have declined sharply. Even the financial press can write articles entitled: “Why Ordinary Americans have Missed Out on the Benefits of Growth” (FT November 2, 2006 p.11).

Financial and investment banks are in charge of advising and directing the ‘restructuring’ of enterprises for mergers and acquisitions by downsizing, outsourcing, give-backs and other cost-cutting measures. This has led to downward mobility for the wage and salaried workers who retain their jobs even as their tenure is more precarious. In other words, the greater the salaries, bonuses, profits and rents for the financial ruling class engaged in ‘restructuring’ for M&As, the greater the decline in living standards for the working and middle class.
One measure of the enormous influence of the financial ruling class in heightening the exploitation of labor is found in the enormous disparity between productivity and wages. Between 2000 and 2005, the US economy grew 12%, and productivity (measured by output per hour worked in the business sector) rose 17% while hourly wages rose only 3%. Real family income fell during the same period (FT November 2, 2006 p.11). According to a poll in the fall of November 2006, three quarters of Americans say they are either worse off or no better off than they were six years ago (FT November 3, 2006 p.13).

The impact of the policies of the financial ruling class on both the manufacturing and service sectors transcends their profit skimming, credit leverage on business operations and management practices. It embraces the entire architecture of the income, investment and class structure. The growth of vast inequalities between the yearly payments of the financial ruling class and the medium salary of workers has reached unprecedented levels. The financial elite receives something in the range of a ratio of 500 up to 1000 times that of an average worker, depending on how narrowly or broadly we conceive of the financial ruling class.

Members of the financial ruling class have noted these vast and growing inequalities and express some concern over their possible social and political repercussions. According to the Financial Times (December 21, 2006), billionaire Stephen Schwartzman, CEO of the private equity group Blackstone warned “that the widening gap between Wall Street’s lavish pay packages and middle America’s stagnating wages risks causing a political and social backlash against the US’s ‘New Rich’”. Treasury Secretary and former CEO of Goldman Sachs, Hank Paulson admitted that median wage stagnation was a problem and that amidst “strong economic expansion many Americans simply are not feeling (sic!) the benefits” (FT November 2, 2006 p. 11).

Ben Bernanke, Chairman of the Federal Reserve Bank testified before the Senate that “inequality is potentially a concern for the US economy…to the extent that incomes and wealth are spreading apart. I think that is not a good trend” (Ibid). In 2005 the proportion of national income to GDP going to profits, rents and other non-wage and salary sources is at record levels – 43%. Inequality in the distribution of national income in the US is the worst in the entire developed capitalist world. Moreover studies of time series data reveal that in the US inequality increased far greater and intergenerational social mobility was far more difficult in the US than any country in Western Europe. The growth of monstrous and rigid class inequalities reflects the narrow social base of an economy dominated by finance capital, its ingrown intergenerational linkages and the exorbitant entry fees ($50,000 per annum tuition with room and board) to elite private universities and post-graduate business schools. Equally important, the political power of finance capital and its ‘associated’ conglomerates wield uncontested political power in the US in comparison to any country in Europe. As a result the US government redistributes far less through the tax and social security, health and educational system than other countries. (ibid)

While some financial rulers express some anxiety about a ‘backlash’ from the deepening class divide, not a single one publicly supports any tax or other redistributive measures. Instead they call for increases in educational up-grading, job retraining and greater geographical mobility, though it is precisely among the educated middle class which is suffering salary stagnation.

Neither the Democratic Party majority in Congress, nor the Republican-controlled Executive offer any proposals to challenge the financial ruling class’s dominance nor are there any proposals to reverse its most retrograde policies causing the growing inequalities, wage stagnation and the increasing rigidity of the class structure. The reason has been reported in the Wall Street Journal and the Financial Times: An overwhelming chunk of the funds that Democrats raise nationally for election campaigns comes either from Wall Street financiers or Silicon Valley software entrepreneurs. (FT November 3, 2006 p. 13). The Democratic congressional electoral campaign was tightly controlled by two of Wall Street’s favorite Democrats, Senator Charles ‘Israel First’ Schumer and Congressman Rahm Immanuel, who selectively funded candidates who were pro-war, pro-Wall Street and unconditionally pro-Israel. Democrats slated to head strategic Congressional committees like Zion-Lib Barney Frank have already announced they have ‘good working relations’ with Wall Street.

The Financial Ruling Class Also Governs

Ruling classes rule the economy, are at the top of the social structure and establish the parameters and rules within which the politicians operate. More often than not few actually engage directly in congressional politics, preferring to build economic empires while channeling money toward candidates prepared to do their bidding. Only when an apparent division occurs, especially within the Executive, between the interests of the ruling class and the policies of the regime will elite members of the ruling class intervene directly or take a senior executive position to ‘rectify’ policy.

Ruling Class Political Power: Paulson Takes Over Treasury

Several sharp divergences occurred during the Bush regime between finance capital and policymakers. These policies prejudiced or threatened to seriously damage important sectors of the financial ruling class. Theses include: 1) the aggressive militarist and protectionist policies pursued by senior Pentagon officials and ‘Zion-con’ Senators toward China; 2) the political veto by Congress of the sale of US port management to a Gulf State-owned company and of a US oil company to China; 3) the failure of the Bush regime to secure the privatization of social security and to weaken the regulatory measures introduced in the aftermath of the massive corporate (Enron and World Com) and Wall Street swindles and 4. the need to put a check on the uncontrolled growth of fiscal deficits resulting from the Middle East wars, the ballooning trade deficits and the weakening dollar.

The headlines of the financial press (FT December 4, 2006 p.3) spell out finance capital’s direct intervention into key White House policy making:

“Goldman Sachs Top Alumni Wield Clout in White House”

and

“Former Bank Executives Hold Unprecedented Power within a US Administration”

US financial and manufacturing ruling classes have long influenced, advised and formulated policy for US Presidents. But given the stakes, the risks and the opportunities facing the financial ruling class, it has moved directly into key government posts. What is especially unprecedented is the dominant presence of members from one investment bank – Goldman Sachs. In late November 2006, Goldman Sachs (GS) senior executive William Dudley took over the Federal Reserve Bank of New York markets group. Hank Paulson, ex-CEO of GS is Treasury Secretary – explicitly anointed by President Bush as undisputed czar of all economic policies. Reuben Jeffrey, a former GS managing partner is the chief regulator of commodity futures and options trading, Joshua Bolten, White House Chief of Staff (he decides who Bush sees, when and for how long – in other words arranges Bush’s agenda) served as GS executive director. Robert Steel, former GS vice chairman, advises Paulson on domestic finance. Randall Fort, ex-GS director of global security, advises Secretary of State Rice. The ex-GS officials also dominate Bush’s working group on financial markets and financial crisis management. The investment bankers wielding state power will control the Bush regime’s biggest housing giants (Fannie Mae and Freddie Mac), tax policy, energy markets – all issues that directly affect the investment banks. In other words, the financial banks will be ‘regulated’ by their own executives. The degree of finance capital’s stranglehold on political power is evidenced by the total lack of criticism by either party. As one financial newspaper noted: “Neither Mr. Bush nor Goldman have been criticized by Democrats for holding too many powerful jobs in part because the investment bank (GS) also has deep ties to Democrats. Goldman represented the biggest single donor base to the Democrats ahead of this (2006) year’s mid-term election”. (FT December 4, 2006)

Among Paulson’s first moves was to organize a top level delegation to China and a working group to work on forming a ‘strategic partnership’. Its task is to accelerate the ‘opening’ of China’s financial markets to penetration and majority takeovers by US operated investment funds. This represents a potential multi-trillion dollar window of opportunity. By seizing the initiative Paulson hopes to undercut the anti-China cohort of neo-con, Pentagon and White House militarists, as well as backwater backers of Taiwanese independence and Congressional chauvinist demagogues like Senator Schumer who threaten to undermine lucrative US-Chinese economic relations.

To lower the fiscal deficit, Paulson proposes to ‘reform’ entitlements - reduce spending on Medicare and Medicaid and to work out a deal with the Democrats to privatize Social Security piecemeal.

Where finance capital has not been able to fashion a coherent economic strategy is with regard to Washington’s Middle East wars. Because of the pull of the Zionist Lobby on many of leading lights of Wall Street – including its unofficial mouthpieces – the Wall Street Journal and the NY Times – Paulson has failed to formulate a strategy. He sis not even pay lip service to the Baker Iraq Study Group report’s proposal to gradually draw down troops for fear of alienating some key senior executives of Goldman Sachs, Stern, Lehman Brothers et al who follow the ‘Israel First’ line. As a result, Paulson has to work around the Lobby by focusing on dealing with the Gulf city-state monarchies and Saudi Arabia in order to avoid another disastrous repetition of the Dubai Port management sale. Paulson above all wants to avoid Zionist political interference with the two way flow of finance capital between the petrol-financial-banking complexes in the Gulf States and Wall Street. He wants to facilitate US finance capital’s access to the large dollar surpluses in the region. It is not surprising that the Israeli regime has accommodated their wealthy and influential financial backers on Wall Street by drawing a distinction between ‘moderate’ (Gulf States) with whom they claim common interests and ‘Islamic extremists’. Israeli Prime Minister Olmert has directed his zealots in the US-Jewish Lobby to take heed of the refinements in the Party Line in dealing with US-Arab relations.

Nevertheless with all its concentrated political power and its enormous wealth and economic leverage over the economy, Wall Street cannot control or avoid serious economic vulnerabilities or possible catastrophic military-political events.

The Future of the Financial Ruling Class

What is abundantly clear is that one of the main threats to world markets – and the health of the financial ruling class – is an Israeli military attack on Iran. This will extend warfare throughout Asia and the Islamic world, drive energy prices beyond levels heretofore known, cause a major recession and likely a crash in financial markets. But as in the case of the relationships between Israel and the US, the Zionist Lobby calls the shots and its Wall Street acolytes acquiesce. As matters now stand, the Jewish Lobby supports the escalation of the Iraq war and the savaging of Palestine, Somalia and Afghanistan. It has neutralized the biggest and most concerted effort by big name centrist political figures to alter White House policy. Baker, Carter, former military commanders of US forces in Iraq have been savaged by the Zionist ideologues. Under their influence the White House is putting into practice the war strategy presented by the ‘American’ Enterprise Institute (a Zioncon thinktank). As a result parallel to Bush’s appointment of Paulson and Wall Streeters to run imperial economic policy, he has appointed an entire new pro-war civilian military-security apparatus to escalate and extend the Middle East wars to Africa (Somalia) and Latin America (Venezuela).

Sooner or later a break between Wall Street and the militarists will occur. The additional costs of an escalating wars, the continual ballooning debt payments, huge imbalances in the balance of payments and decreasing inflows of capital as multi-national repatriate profits and overseas central banks diversify their currency reserves will force the issue. The enormous and growing inequalities, the massive concentration of wealth and capital at a time of declining living standards and stagnant income for the vast majority, gives the financial ruling class little political capital or credibility if and when an economic and financial crisis breaks.

With foreign investors owning 47% of all marketable US Treasury bonds in 2006 compared to 33% in 2001 and foreign holdings of US corporate debt up to 30% today, from 23% just 5 years ago, a rapid sell-off would totally destabilize US financial markets and the economic system as well as the world economy. A rapid sell-off of dollars with catastrophic consequences cannot be ruled out if US-Zionist militarism continues to run amuck, creating conditions of extended and prolonged warfare.

The paradox is that some of the most wealthy and powerful beneficiaries of the ascendancy of finance capital are precisely the same class of people who are financing their own self-destruction. While cheap finance fueling multi-billion dollar mergers, acquisitions, commissions and executive payoffs, heightened militarism operates on a budget plagued by tax reductions, exemptions and evasions for the financial ruling class and ever greater squeezing of the overburdened wage and salary classes. Something has to break the cohabitation between ruling class financiers and political militarists. They are running in opposite directions. One is investing capital abroad and the other spending borrowed funds at home. For the moment there are no signs of any serious clashes at the top, and in the middle and working classes there are no signs of any political break with the two Wall Street parties or any challenge to the militarist-Zionist stranglehold on Congress. Likely it will take a catastrophe, like a White House-back Israeli nuclear attack on Iran to detonate the kind of crisis which will provoke a deep and widespread popular backlash of all things military, financial and made in Israel.

James Petras, a former Professor of Sociology at Binghamton University, New York, owns a 50-year membership in the class struggle, is an adviser to the landless and jobless in Brazil and Argentina, and is co-author of Globalization Unmasked (Zed Books). His latest book is "The Power of Israel in the United States" (Clarity Press, 2006). He can be reached at: jpetras@binghamton.edu.