Monday, January 26, 2009

Inevitabilily, of stepping into a multipolar world...?

Inevitabilily, of stepping into a multipolar world...?

All truth passes through three stages.
First, it is ridiculed.
Second, it is violently opposed.
Third, it is accepted as being self-evident.{4A67652A-4D79-4340-B956-F5BDF89B07C5}&siteid=mktw&dist=

The dark predictions made by so many in recent years, myself included, are now front page news, with headlines shaking the nerves of Wall Street traders week after week. As Feb gave way to March, the odd “leap day” tacked on at the end of the month saw the markets sell off over 2% of their value, with all 30 Dow stocks down, and the index losing over 315 points. The crisis that has all but obliterated the credit markets continues to ripple through the economy. Mortgage lending, the engine that drove the economy from 2000 to 2006, has seized up and sputtered to a halt. The great spending spree financed by home equity lines of credit has not only come to a full stop, but now has been thrown into reverse as banks begin truncating credit lines and shutting them down. The Washington Post reported: “Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year… They (banks) are responding by freezing or lowering the credit limits on home equity lines, leaving thousands of borrowers in the lurch.” The article detailed a typical example of a $95,000 home equity line suddenly withdrawn by the bank with a single phone call. The party is over.

The culprit? Falling home values are dragging homes into negative equity and, as they sink, they threaten to take the passengers with them into the broiling dark undertow of negative amortization. Countrywide, a ground zero company in Orange County during the housing boom, sent out polite letters decapitating the equity lines of credit for 122,000 homeowners. The equity is gone, and now the homeowners owe more on their homes than current market value, true for at least 10.3% of all homes in the US, according to Moody's Chief economist, Mark Zandi. That is a number that will double or even triple within two years. Their worst case scenario sees a whopping 40% decline in the average value of a home in the US. That would sink a large percentage of younger homeowners, and most speculators who thought they could snap up properties and then settle in with a bag of popcorn and watch “Flip that House” on the Home & Garden TV channel. The show has long since been replaced with new fare, purporting to tell stressed sellers how to make their property more attractive to buyers. Even at today’s prices, however, it is a terrible time to be house shopping. Wait for even a fraction of that 40% decline and save thousands.

Analysts continue to argue over how we got here, though the housing bust was easily predicted. Some blame borrowers who were less than truthful in their loan applications, others blame the banks for delivering the goods rigged to explode—which is what tens of thousands of mortgages are doing now, with foreclosures topping 20,000/day. Others blame the lack of oversight in the system, or as net blogger Mike Whitney puts it: “The Fed refused to perform its oversight duties because its friends in the banking industry were raking in vast profits selling sketchy, subprime junk to gullible investors around the world. They knew about the "massive off balance-sheet positions" which allowed the banks to create mortgage-backed securities and CDOs without sufficient capital reserves. They knew it all; every last bit of it, which simply proves that the Federal Reserve is an organization which serves the exclusive interests of the banking establishment and their corporate brethren in the financial industry.”

That’s no mystery. The Fed is a banking industry, all unto itself. Contrary to popular belief, the “Fed” is a consortium of private banking interests, and not an arm of the US Government. Amazingly, this group of private banks was empowered by Congress to manage the nations money supply, with the ability to print dollars at its whim. What an incredible business! Lately, however, aside from being asleep at the job the last 5 years, the “Fed” has simply botched the job of looking out for its corporate banking brethren. It has been unable to prevent the deflation in the credit markets, just as it was unable to prevent the collapse of Bear Stearns.

The inevitable consequences of this credit crisis are easy to predict. Like an engine that has suddenly run out of gas, people will stop spending. They’ll stop applying for mortgages, auto loans, and the one-day sales at the shopping malls will soon be pathetic, lonesome affairs. The central driver of the US economy, the consumer, can no longer buy with nothing down and easy financing. Panicked consumers, who have relied on credit to fund virtually all major purchases, have now turned to credit cards as the fuel of last resort, like that last jerrycan of gasoline carried in the trunk of their car. The plastic will get them a few more miles, but when they finally pull into the gas station the pumps will be dry.

Guy Kovner of the Press Democrat reported: “The credit card crunch, which afflicts the affluent as well as the indigent, is the product of a free-spending population that saves almost nothing, packs handfuls of plastic cards in their wallets and has nothing but credit to fall back on in the event of a personal setback or unexpected expense.”

That “plastic safety net” is now becoming a rickety suspension bridge over troubled water. Americans increased credit card spending by 7.9% last year, an all time record increase. They have piled up over a trillion dollars in revolving charge card debt, one of the most profitable business lines for most banks these days. And with banks strapped for capital, tens of thousands of credit card customers have been slammed with sudden interest rate hikes, even if they have always paid on time. Some banks have raised rates as high as 36%--and it has prompted congress to begin pondering a credit card bill of rights to stop the predatory lending and unfair practices where fees, points and interest are the only concern of the lenders.

Why? The banks simply do not have funds to lend now, and the financial freeways will see traffic thin out in a massive deflation that will bring the economy to the edge of a depression as serious and damaging as the Great Depression of the 1930s. In fact, the debt bubble carried in housing and revolving credit exceeds the liabilities that destroyed the economy back then, many times over. The damage to the housing market is already much worse than that suffered during the Great Depression. Home values have plummeted to erase $7.1 trillion in equity in the last year, and there is no bottom in sight yet for housing. Over $5 trillion has been lost in jittery stock markets throughout the world since August, 2007.

The Big Losers:

Citigroup: - $46.6B
HSBC: - $25.6B
UBS: - $19.2B
Merrill Lynch: -$19.4B
Morgan Stanley: - $13.8B
Carlyle Group: - $16.6B
Bank of America: - $7.2B
Bear Stearns: - $???

By comparison, the combined insured deposits in all FDIC insured US banks is a little over $6 trillion and the existing capital reserves of all major US banks is about $1 trillion, so we have already suffered damage twelve times the total reserve capital of our banking system, and exceeding the value of all insured deposits! And the major banks have already sustained “writedowns” exceeding $150 billion, (Citigroup alone losing over $42 billion), or 15% of their total reserves. Wow… Noted economic analyst Meredith Whitney, an analyst with Oppenheimer & Co. Inc., said that final losses would be far more dramatic than people expect, and forecasted that banks would see earnings plummet by nearly a third, 29%, in 2008. The value of their stocks could fall another 40% in her estimate. The list above is but the leading edge of the storm. many more banks continue to hide losses with clever accounting schemes. Eventually they will have to come clean. Wells Fargo, for example, has about a third of its $142 billion portfolio in sub-prime loans. Thus far they have only “written down” a measly 1% of that portfolio. Expect more damage dead ahead. Losses of this magnitude, along with the sinking value of homes, have not been seen in the US since the Great Depression. Is it any wonder that the Fed is printing money by the billions and loaning it to banks in exchange for virtually worthless securities? The system is collapsing.


The Fall of the Bear

In my article “Bear Market” led by the graphic above last August, the troubled financial house topped the news when two of its major hedge funds imploded. Apparently the funds were being used as cesspools to dump huge amounts of toxic mortgage backed securities on the Bear’s books. Months later, the firm as a whole would suffer the same fate. Now the Bear appears down for good. On March 14th Bear Stearns went on life support with “liquidity concerns.” In layman’s terms, that means they were broke, bankrupt, insolvent. The CEO claimed nearly $20 billion in liquid assets Monday, and by Thursday the 14th it was mysteriously gone, vanished into the black financial hole that is devouring one firm after another. As investors fled the venerable 85 year old house in March, commentators described the landmark event as a “run on the bank.”

Bear Stearns was the nation’s fifth largest financial investment institution, and J.P. Morgan and the Fed had to intervene with emergency cash. By Friday JP Morgan announced they would acquire the fallen Bear for a paltry offer of $2 per share. A rare 1930s Depression era provision was invoked by the Fed to broker the deal. A year ago the stock traded for $170. Lost in the mix were the life savings of thousands of investors, some seeing 90% of their assets evaporate in a few days time. Shell shocked employees cleared out their desks, their jobs evaporated along with all the missing “liquidity.” Investors are reported to have lost $170 billion in the maw of the fallen Bear. On St. Patty’s Day the bagpipers playing on the trading floor of Wall Street wailed out a dolorous dirge in front of Bear Stearns, and the market shuddered, wondering who was next.

Always with his finger on the ever fading pulse of the nation, commentator James Kunstler described the event this way: “Over the weekend, the Federal Reserve engineered a $30-billion dollar Saint Patrick’s day present for the JP Morgan bank by handing them the corpse of Bear Stearns. The object of the game is to prevent the "assets" of Bear Stearns from going to the auction block, on which they would be discovered to be nearly worthless, which would instantly render all similar assets held by the other big banks to be similarly worthless, and would result in a universal margin call that would pretty much unwind the hallucinated "wealth" acquired the past ten years.”

If anyone thinks arranging the sale of Bear for a paltry $2 per share was some kind of “creative” or “innovative” action by the Fed, they must be crazy. The loss there was staggering. It was nothing to feel warm or gushy about. The market’s reaction, bouncing up on the news, was an alarming disconnect. The last time such a dramatic move was made to save a major financial house occurred... yes, during the Great Depression, and by JP Morgan. We have now entered a dangerous zone where common household names in the financial industry will come tumbling down. Lehman Brothers saw its stock plunge 35% in just a few hours of trading as the fear spread. Another name bandied about on the acquisition lists is the company everyone was “thanking” in their commercials a few years back, Paine Weber. Oh, how the mighty have fallen. Even the Neo-Con stronghold Carlyle Group is in a state of collapse. The firm once boasted it held a portfolio in excess of $20 billion, yet it could not make a paltry $400 million margin call as it fell into default. It got into trouble before the news on Bear Stearns shook the market, perhaps contributing to the distress at Bear Stearns, as the Bear had a 15% position in Carlyle. When the firms once staffed by hard core Bush cronies start closing up shop and packing suitcases, watch out. The rats are fleeing the sinking ship, and God only knows how much money they are carting off as they go.

The problems afflicting Bear Stearns are endemic to the system as a whole, which saw $300 billion in equity evaporate on Friday, March 14th alone. The London Based Independent reported: “A Goldman Sachs trader in New York said: "Everyone is in a total state of shock, aghast at what is happening. No one wants to talk, let alone deal; we're just standing by waiting. Everyone is nervous about what is going to emerge when trading starts tomorrow."

The “President's Working Group on Financial Markets,” known on the street as the “Plunge Protection Team,” convened an emergency meeting on St. Patrick’s Day, while the London Times asked: “Which bank is going to follow the Bear?” At the moment large banks are simply borrowing all the reserves they list from the TAF auction offered by the Fed, a 28 day loan against “assets.” The reserves they list from other sources, (non-borrowed), have gone into negative numbers. While this may simply be a money shell game, or a fluke of the arithmetic, the fact that bank borrowing from this Term Auction Facility is skyrocketing indicates how desperate they are for new sources of capital. As banks soak up the temporary 28 day “loans” the Fed was forced to double the size of the fund from $50 billion to $100 billion on March 7th. In effect, the banks are broke, just like the nation as a whole.

The US holds the unenviable position of being dead last (#163) for “current account balance,” a measure of “net trade in goods and services, plus net earnings from rents, interest, profits, and dividends…with the rest of the world” according to the CIA world factbook. We’re nearly $800 billion in the red. Not so for Red China however. The communists are decidedly in the black, topping the list with an annual surplus of $363 billion. How humbling it is to look at the list and see countries like Zambia, Yemen, the Congo, Burma, and little island states like Palau and Tuvalu well ahead of the US, in positive numbers compared to our staggering losses each year. And the damage is not simply an embarrassing series of numbers in a spreadsheet. Just read the headlines in any decent newspaper these days.

The London Times reported that cities all across the US are being gutted by foreclosures as the crisis escalates. Cleveland, for example, now has 35,000 vacant homes due to foreclosure, a number exceeding the homes lost in New Orleans due to Hurricane Katrina. Sacramento saw the foreclosure rate exceed the sale of new homes for the first time in history. In my September, 2005 article on Hurricane Katrina, I wrote: “The crisis in New Orleans is a microcosm of America as a whole. We are a society living below sea level in a rising tide of energy adversity. And the Big Easy, along with the easy American life style, may be gone forever.” Now Cleveland is merely one typical city that has been slammed by the financial storm I predicted years ago, and it is not even the worst. Las Vegas, Sacramento, Phoenix, Miami… city after city is sustaining hurricane force damage to its housing market and, as values sink, all the financial underpinnings that sustain the market are collapsing with them. Foreclosures for January were up 90% over 2007 numbers. On top of this, over 200,000 newly built homes are sitting vacant in the US as of this writing. It is as if the US had just been strategically bombed, with thousands of empty homes being the great damage we have already sustained from the housing bust. And now the unemployment numbers are turning decidedly negative as well.

All this has happened while Bush frantically maintained Osama Bin Ladin was the great threat facing America, and while he dumped trillions into the war in Iraq, (though Osama holds forth in Pakistan, if he is still alive at all). No one in their right mind now thinks that Bush made such a massive commitment of national resources to simply “free the Iraqi people” after he discovered (oops) that there were no weapons of mass destruction in Saddam’s larders. Bush invaded Iraq for control over the world’s oil production—for the oil our society needs to continue running. In 2002, the year before the invasion, the average price of a barrel of oil was $22.81. In March or 2008, after nearly 6 years of war there, (exceeding the duration of WWII), oil was hitting all time highs over $105. Nice job, Mr. President. And while we were all entertained with the hunt for Saddam and his lengthy trial, the bankers were setting up the economy for the crash now underway with their irresponsible lending, rampant speculation, shady accounting, fraudulent securities ratings and the whole shebang. This is the great sham of the “war on terror.” Terrorists have not harmed anyone on US soil since that awful day on 9/11. By contrast, the banks and financial hucksters in three piece suits have harmed tens of millions of Americans. They have broken homes, marriages, and families with their Option ARM bombshells, ruined careers, wiped out life savings, destroyed equity, swindled investors, and brought the economy to the edge of oblivion. The financial losses are equivalent to those sustained by a 9/11 scale attack—every week! And Bush is worried about terrorists? About Iran?

In Like A Lion

So as the long winter began to loosen its grip, a particularly cold and snowy season this year, the nation’s hope for an early spring in the financial markets has been seen to be the delusion it always was. March definitely came “in like a lion,” but it is not likely to go out like a lamb. The crisis will only deepen by tax time. All the programs aimed at stopping the housing disaster have come to naught. The mortgage telephone help lines, bailout money, the stimulus package, are all simple exercises in wishful thinking. The banks are “securitized” up to their eyeballs in highly leveraged, and now lethally toxic, debt. In fact, they are insolvent by any real measure of assets vs. liabilities. Like the homeowners who are now “underwater” as their home value erodes, the banks holding the liens, the CDO, the SIVs and other clever instruments of debt packaging, are equally bankrupt. They are desperate for new capital. They are foreclosing on delinquent loans, cutting off lines of credit, jacking up interest rates, increasing fees, borrowing from the Fed, and from foreign “sovereign wealth funds.” And they are getting very stingy with loan money now. Throwing “liquidity” at a solvency problem is a plan doomed to failure. Since money created by the Fed is basically debt, and debt is not real money, the idea of curing a bad debt problem by creating more debt is insane. But the Fed can do little else.

John Hoeffel for the Executive Intelligence Review put it this way: “What we are facing is a crisis of the banking system itself, and of the securitization and off-balance-sheet apparatus which the banks created to hide their own bankruptcy, and anyone who is afraid to say that, is irrelevant...the Fed realizes the banking system is in meltdown mode, and it is fair to suspect that the Fed is doing far more than it would dare publicly admit, to keep the banks' doors open.” The massive resizing of the TAF fund is a typical example, and the Fed apparently has other tricks up its sleeve, announcing a $200 billion dollar liquidity offer on March 11 that sent the Dow surging up 416 points. The gains were quickly lost in subsequent sessions as the bad news continued to shake the markets.

The little guy fights back.

To further complicate matters, homeowners are fighting back. Some simply walk away from their devalued properties, refusing to service the bogus loan any longer, while others simply stop paying and challenge the bank to prove they own the note on their home in a foreclosure proceeding. And the banks are losing in court. Bloomberg reported that: “Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven’t been able to prove they own the mortgages.” Oops… They wrote thousands of questionable loans, sold them off in securities, and now they can’t even prove they own the deed--because they don’t own the deeds! Desperate, with obligations exceeding their available capital many times over, banks have finally realized they are technically insolvent. If typical Americans realized this, and got nervous enough about it to begin withdrawing their cash from bank accounts, the available money would only cover about 1% of the demand. The FDIC has only $50 billion in reserves to try and “insure” customer bank deposits approaching $6 trillion. Get in line early.

Think your money is safe and sound in the bank for your use? Think again. The banks are getting real particular about how you use it, almost as if they thought of all that depositor cash as their money. The Consumerist reported that a fairly well off customer got a shock the other day when he went in to a store and selected a big home theater system costing $5800. He had $10,000 in his checking account, more than enough to pay for the system, but his platinum check card declined the charge. After haggling with Bank of America on the phone for an hour, he was simply told there was a $5000. per day ceiling on spending for all Bank of America customers. When things get really tight, watch as that spending limit begins to shrink like the bank’s balance sheet. Some customers have reported having debit card charges of $1500 declined due to this “spending limit” policy. (Apparently the limit is different from person to person, but you can bet the super wealthy never run into this kind of situation when they plunk down $30,000 for a new Mercedes.)

A reader responding to the consumerist blog article commented: “Same damn thing happened to me with Wells Fargo. I put $1400 CASH in my account 3 days ahead of time (not check, cash) to go buy furniture, used the check card, and Bingo - denied. Same scenario, same long phone call, same humiliation, same smarmy smart ass peons who REFUSED to raise the credit line, even just for that sale for one hour, because, and get this - according to the Third Tier Manager at the phone bank I escalated to, "I'm sorry sir, but that kind of situation doesn't meet our guidelines. You don't DESERVE a waiver."

Banks have a nifty policy of putting a “hold” on your funds for a couple of days after you deposit them—even direct cash deposits! While your money sits in that strange financial limbo, the bank is, of course, sweeping it from your account and trundling it off to interest bearing “instruments” to increase their profits. Yet when you want to use your own damn money, you need permission from the bank first! It’s outrageous.

Imagine that spending limit falling to $1000 per day, to $500. You get my point. Just as hedge funds have simply closed their doors and frozen investor withdrawals, the banks all have policies on how much of your money you can spend at any one time. (For your own safety, of course). But walk in with a nice fat deposit and they are all smiles. There’s no limit on the amount of money they will happily take from you each day. Deposit too much money, however, and they’ll have to call Homeland Security. Isn’t it odd how the minute you let go of your hard earned cash by putting it in a bank, that institution suddenly gets the fanciful notion that the money is theirs. They immediately tell you when you’ll be able to actually access it, and how much of it you can spend each day, and they make a quiet little phone call to make sure you aren’t in league with Al Qaeda—as if you, by bringing them money, were somehow the great threat to the nation—the very same nation they have so damaged with their shoddy lending, fraudulent “securitized” investment schemes and financial sleight of hand.

If the banks think they have trouble now, wait until the average customer gets fed up and starts demanding the money in their “demand accounts.” I can just hear the new “policy” statements being drafted now. Last month the FDIC put banks on notice as to the new rules that will apply in the event of a failure or bank run. The agency has also begun beefing up its staff, re-hiring veteran retirees as the trouble looms. The Federal Reserve Bank of Atlanta has distributed a nifty DVD to its member banks on how to prepare for a disaster. These aren’t exactly comforting headlines in this troubled economic climate. Four US banks failed in 2007. The Washington Post reported that perhaps 100 banks could fail this year alone. The death watch has started.

The danger is so real, even for huge national banks, that Bank of America is quietly lobbying the Senate for a massive bailout plan that would exceed $739 billion. They want all that evaporated home equity to be “forgiven” and the government to buy up all the bad paper banks have pumped out the last five years. In effect, they want to dump the liability on you and me again, the US taxpayer. That’s a great way to finally get it off their balance sheets. Well, the government gets its money from taxpayers, in fact, the banks get their money from us as well. Look what they’ve been doing with it. We’re going to spend a cool trillion for the military and our two endless wars in Afghanistan and Iraq this year. That is twice the military budgets of all other developed nations combined. What are we getting for it? And who profited from the housing boom? Was it the average US taxpayer? I think not.

groceriesBut despair not. The Government is planning on sending you a check this May to put you in the mood for spending . The economic “stimulus” package will end up putting enough money into consumers hands for the typical family of four to buy two or three weeks groceries. Now… get ready to pony up seven times that in taxes to bail out the banks

Russia checkmates USA on the road to Afghanistan...

Precise, quick, deadly - the skills of a soldier are modest. But then, US Central Command chief General David Petraeus is more than a soldier. The world is getting used to him as somewhere more than halfway down the road to becoming a statesman. Sure, there may be warfare's seduction over him still, but he is expected to be aware of the political realities of the two wars he conducts, in Iraq and Afghanistan.

That is why he tripped last Tuesday when he said while on a visit to Pakistan that the American military had secured agreements to move supplies to Afghanistan from the north, easing the heavy reliance on the transit route through Pakistan. "There have been agreements reached, and there are transit lines now and transit
agreements for commercial goods and services in particular that include several countries in the Central Asian states and Russia," Petraeus said...

He was needlessly precise - like a soldier. Maybe he needed to impress on the tough Pakistani generals that they wouldn't hold the US forces in Afghanistan by their jugular veins for long. Or, he felt simply exasperated about the doublespeak of Janus-faced southwest Asian generals.

The shocking intelligence assessment shared by Moscow reveals that almost half of the US supplies passing through Pakistan is pilfered by motley groups of Taliban militants, petty traders and plain thieves. The US Army is getting burgled in broad daylight and can't do much about it. Almost 80% of all supplies for Afghanistan pass through Pakistan. The Peshawar bazaar is doing a roaring business hawking stolen US military ware, as in the 1980s during the Afghan jihad against the Soviet Union. This volume of business will register a quantum jump following the doubling of the US troop level in Afghanistan to 60,000. Wars are essentially tragedies, but can be comical, too.

Moscow disclaims transit route

At any rate, within a day of Petraeus' remark, Moscow corrected him. Deputy Foreign Minister Alexei Maslov told Itar-Tass, “No official documents were submitted to Russia's permanent mission in NATO [North Atlantic Treaty Organization] certifying that Russia had authorized the United States and NATO to transport military supplies across the country."

A day later, Russia's ambassador to NATO, Dmitry Rogozin, added from Brussels, "We know nothing of Russia's alleged agreement of military transit of Americans or NATO at large. There had been suggestions of the sort, but they were not formalized." And, with a touch of irony, Rogozin insisted Russia wanted the military alliance to succeed in Afghanistan.

"I can responsibly say that in the event of NATO's defeat in Afghanistan, fundamentalists who are inspired by this victory will set their eyes on the north. First they will hit Tajikistan, then they will try to break into Uzbekistan ... If things turn out badly, in about 10 years, our boys will have to fight well-armed and well-organized Islamists somewhere in Kazakhstan," the popular Moscow-politician turned diplomat added.

Russian experts have let it be known that Moscow views with disquiet the US's recent overtures to Central Asian countries regarding bilateral transit treaties with them which exclude Russia. Agreements have been reached with Georgia, Azerbaijan and Kazakhstan. Moscow feels the US is pressing ahead with a new Caspian transit route which involves the dispatch of shipments via Georgia to Azerbaijan and thereon to the Kazakh harbor of Aktau and across the Uzbek territory to Amu Darya and northern Afghanistan.

Russian experts estimate that the proposed Caspian transit route could eventually become an energy transportation route in reverse direction, which would mean a strategic setback for Russia in the decade-long struggle for the region's hydrocarbon reserves.

Russia presses for role in Kabul

Indeed, Uzbekistan is the key Central Asian country in the great game over the northern transit route to Afghanistan. Thus, during Russian President Dmitry Medvedev's visit to Tashkent last week, Afghanistan figured as a key topic. Medvedev characterized Russian-Uzbek relations as a "strategic partnership and alliance" and said that on matters relating to Afghanistan, Moscow's cooperation with Tashkent assumed an "exceptional importance".
He said he and Uzbek President Islam Karimov agreed that there could be no "unilateral solution" to the Afghan problem and "nothing can be resolved without taking into account the collective opinion of states which have an interest in the resolution of the situation".

Most significantly, Medvedev underlined Russia had no objections about US President Barack Obama's idea of linking the Afghanistan and Pakistan problems, but for an entirely different reason, as "it is not possible to examine the establishment and development of a modern political system in Afghanistan in isolation from the context of normalizing relations between Afghanistan and Pakistan in their border regions, setting up the appropriate international mechanisms and so on".

Moscow rarely touches on the sensitive Durand Line question, that is, the controversial line that separates Afghanistan and Pakistan. Medvedev underscored that Russia remained an interested party, as there was a "need to ensure that these issues are resolved on a collective basis".

Second, Medvedev made it clear Moscow would resist US attempts to expand its military and political presence in the Central Asian and Caspian regions. He asserted, "This is a key region, a region in which diverse processes are taking place and in which Russia has crucially important work to do to coordinate our positions with our colleagues and help to find common solutions to the most complex problems."

Plainly put, Moscow will not allow a replay of the US's tactic after September 11, 2002, when it sought a military presence in Central Asia as a temporary measure and then coolly proceeded to put it on a long-term footing.

Karzai reaches out to Moscow

Interestingly, Medvedev's remarks coincide with reports that Washington is cutting Afghan President Hamid Karzai adrift and is planning to install a new "dream team" in Kabul.

Medvedev had written to Karzai offering military aid. Karzai apparently accepted the Russian offer, ignoring the US objection that in terms of secret US-Afghan agreements, Kabul needed Washington's prior consent for such dealings with third countries.

A statement from the Kremlin last Monday said Russia was "ready to provide broad assistance for an independent and democratic country [Afghanistan] that lives in a peaceful atmosphere with its neighbors. Cooperation in the defense sector ... will be effective for establishing peace in the region". It makes sense for Kabul to make military procurements from Russia since the Afghan armed forces use Soviet weaponry. But Washington doesn't want a Russian "presence" in Kabul.

Quite obviously, Moscow and Kabul have challenged the US's secret veto power over Afghanistan's external relations. Last Friday, Russian and Afghan diplomats met in Moscow and "pledged to continue developing Russian-Afghan cooperation in politics, trade and economics as well as in the humanitarian sphere". Significantly, they also "noted the importance of the Shanghai Cooperation Organization [SCO]" that is dominated by Russia and China.

SCO seeks Afghan role

Washington cannot openly censure Karzai from edging close to Russia (and China) since Afghanistan is notionally a sovereign country. Meanwhile, Moscow is intervening in Kabul's assertion of independence. Moscow has stepped up its efforts to hold an international conference on Afghanistan under the aegis of the SCO. The US doesn't want Karzai to legitimize a SCO role in the Afghan problem. Now a flashpoint arises.

A meeting of deputy foreign ministers from the SCO member countries (China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan) met in Moscow on January 14. The Russian Foreign Ministry subsequently announced that a conference would take place in late March. The Russian initiative received a big boost with Iran and India's decision to participate in the conference.

New Delhi has welcomed an enhanced role for itself as a SCO observer and seeks "greater participation" in the organization's activities. In particular, New Delhi has "expressed interest in participating in the activities" of the SCO contact group on Afghanistan.

The big question is whether Karzai will seize these regional trends and respond to the SCO overture, which will enable Kabul to get out of Washington's stranglehold? To be sure, Washington is racing against time in bringing about a "regime change" in Kabul.

The point is, more and more countries in the region are finding it difficult to accept the US monopoly on conflict-resolution in Afghanistan. Washington will be hard-pressed to dissociate from the forthcoming SCO conference in March and, ideally, would have wished that Karzai also stayed away, despite it being a full-fledged regional initiative that includes all of Afghanistan's neighbors.

The SCO is sure to list Afghanistan as a major agenda item at its annual summit meeting scheduled to be held in August in Yekaterinburg, Russia. It seems Washington cannot stop the SCO in its tracks at this stage, except by genuinely broad-basing the search for an Afghan settlement and allowing regional powers with legitimate interests to fully participate.

The current US thinking, on the other hand, is to strike "grand bargains" with regional powers bilaterally and to keep them apart from collectively coordinating with each other on the basis of shared concerns. But the regional powers see through the US game plan for what it is - a smart move of divide-and-rule.

Moscow spurns selective engagement

No doubt, these diplomatic maneuverings also reveal the trust deficit in Russian-American relations. Moscow voices optimism that Obama will constructively address the problems that have accumulated in the US-Russia relationship. But Russia figured neither in Obama's inaugural address nor in the foreign policy document spelling out his agenda.

Last Tuesday, Russian Foreign Minister Sergei Lavrov summed up Moscow's minimal expectations: "I hope the controversial problems in our relations, such as missile defense, the expediency of NATO expansion ... will be resolved on the basis of pragmatism, without the ideological assessment the outgoing administration had ... We have noticed that ... Obama was willing to take a break on the issue of missile defense ... and to evaluate its effectiveness and cost efficiency."

But Russia is not among the new US administration's priorities. Besides, as the influential newspaper Nezavisimaya Gazeta noted last week, "A considerable number of [US] congressmen from both parties believe Russia needs a good talking-to." The current Russian priority will be to organize an early meeting between Lavrov and Secretary of State Hillary Clinton, and until such a meeting takes place, matters are on hold - including the vexed issue of the transit route for Afghanistan.

Thus, while talking to the media in Tashkent, Medvedev agreed in principle to grant permission to the US to use a transit route to Afghanistan via Russian territory, but at once qualified it saying, "This cooperation should be full-fledged and on an equal basis." He reminded Obama that the "surge" strategy in Afghanistan might not work. "We hope the new administration will be more successful than its predecessor on the issues surrounding Afghanistan," Medvedev said.

Evidently, Petraeus overlooked that the US's needless obduracy to keep the Hindu Kush as its exclusive geopolitical turf right in the middle of Asia has become a contentious issue. No matter the fine rhetoric, the Obama administration will find it difficult to sustain the myth that the Afghan war is all about fighting al-Qaeda and the Taliban to the finish.