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Up and Down Wall Street
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WEDNESDAY, APRIL 18, 2012
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Housing Is Bouncing Along the Bottom of an Abyss
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By RANDALL W. FORSYTH
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The Beatles were prescient about today's U.S. housing market: It's getting better because it can't get no worse.




"I have to admit it's getting better, getting better all the time," the Beatles sang on "Sergeant Pepper's Lonely Hearts Club Band" back in the Summer of Love in 1967. "Can't get no worse" was the late John Lennon's under-the-breath rejoinder.



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All of which comes to mind all these many years later when looking at the latest news on the housing sector. Things are getting better in residential real estate, chirps the fact-free business report on drive-time radio. Yet any clear-eyed view of the data shows housing activity bouncing along the bottom of an abyss after the housing bubble burst in 2006 and the market spiraled downward through early 2009. Since then, it couldn't get any worse.





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Housing starts fell 5.8% in March, to a seasonally adjusted annual rate of 654,000 units, the Commerce Department reported Tuesday. It's obvious the unseasonably warm weather in some parts of the nation distorted the data. In the Northeast, seasonally adjusted housing starts were reported to have jumped 33%. The reality is the unseasonably warm weather last month -- in the high 70s in New England, shuttering ski resorts early -- let builders start houses before the equinox.


.The thin reed grabbed by housing bulls was that building permits rose 4.5% in March, which should portend more construction activity in coming months. After all, neither rain nor snow nor sleet nor global warming should deter builders from filing their paperwork, a process as expensive and arduous as what provoked the American colonists to revolt some two-plus centuries ago.



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Permits actually were filed primarily for "multifamily" homes, which translated from the bureaucrat patois means townhouses and apartment buildings. Demand for rental housing is up, whether because folks can't qualify for mortgages or have decided owning a single-family home isn't their American Dream even if they can get financing. Many older baby boomers, who listened to Sergeant Pepper's on vinyl 45 years ago, no doubt are eager to trade their house for an apartment to get rid of the yard work, utility bills and the unemployed slacker kid in the basement.


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Beyond that, Joan McCullough, the astringent analyst at East Shore Partners, posits up another excuse, er, reason for the 21% jump in multifamily building permits in March. It may be that money ladled out under the American Recovery and Reinvestment Act of 2009 -- aka ARRA, the $787 billion stimulus bill -- figures into the story.


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Ringing up the Feds, McCullough finds a lot of "mixed-use" (read apartments upstairs and commercial downstairs) permits, which would fit with the public-private nature of ARRA spending. A local agency puts together senior-citizen or low-income projects and the private builder files the permits.



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March is a popular month for deadlines for public housing authorities and reallocation of ARRA money to various housing agencies. Money for projects that don't make the cut gets transferred to another agency, which quickly gets its project going. It's mostly circumstantial but intriguing nonetheless.


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That may explain the month-to-month squiggles but not the big picture. As John Williams writes on his Shadow Government Statistics (www.shadowstats.com), housing starts saw their 40th straight month of stagnation at historically low levels. Starts remain mired at a 600,000 annual rate on average, less than half the pre-bubble median and a far cry from the two-plus million starts of houses with rotting Chinese drywall slapped together at the height of the bubble in 2006.



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Anybody who cares to chance their money on such abodes can buy them on the cheap with the assistance of free money provided by Ben Bernanke's Federal Reserve. And there are plenty available -- the shadow inventory is estimated at four million units -- especially as big banks clear their backlogs of defaulted homes.



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Seen in this light, it's not surprising that optimism among home builders -- who have to put down money when they start a house -- dipped last month. The National Association of Home Builders' index slipped last month, which suggests things aren't getting better as fast as they thought in February, but a darned sight better than the nadir of last fall.


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Certainly, builders will break ground on some new homes and (more likely) townhouses. After all, you can't move the glut of Las Vegas houses to the pockets of strength. And prospective buyers may prefer new construction to foreclosed houses that were trashed by the former owners on their way out the door.




But the recent action of home-builders' stocks underscored the NAHB index's message that things may not be getting all that much better. Toll Brothers (ticker: TOL), Lennar (LEN), D.R. Horton (DHI) and Beazer Homes (BZH) have all rolled over in the past month after the run-ups since late last year, while KB Home (KBH) is down more than one-third from its peak as is Hovnanian Enterprises (HOV.) Just can't get no worse.



Last updated:April 18, 2012 7:29 pm

Latin America: A toxic trade

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Alleged drug trafficker of the gang "La Familia Michoacana"
Handcuffed: a woman under arrest in Mexico City for alleged drug trafficking. Police are routinely masked to avoid becoming targets for gang reprisals





Amid the dizzying rise in commodities prices of the past decade, there are two notable exceptions: heroin and cocaine.



Both products have defied inflation in ways only computer microprocessors can match: narcotics are cheaper in real terms than they were 20 years ago.
This is just one illustration of a global failure to restrict the supply of illegal drugs. Though the fight has cost billions of dollars and thousands of lives, the trade – and its effects on those who take the products – has barely been dented. Production has increased, and global consumption with it. Of an estimated 272m users of illegal drugs worldwide, about 250,000 consumers lose their lives every year.




America remains the world’s largest drug market, and Europe is catching up fast. It is increasingly accepted that the prohibition policy known as the war on drugs launched 40 years ago by US president Richard Nixon “has failed” – as a recent report by the Global Commission on Drug Policy (endorsed by three former Latin American presidents, a former UN chief and a former US Federal Reserve head) bluntly put it.



This is prompting hand-wringing in Washington and other western capitals. But in Latin America, the biggest production and trading centre, the consequences of this failure continue to mount in ways barely appreciated elsewhere.



About 40,000 people have been killed in Mexico, mostly by cartels, since president Felipe Calderón launched an assault on organised drug crime four and a half years ago. In Central America levels of violence, by some estimates, are worse than in Afghanistan or Iraq.



Social and political peace are under threat. “A drug-trafficking tsunami has befallen the region,” says Kevin Casas-Zamora, a former vice-president of Costa Rica and now an analyst at Brookings, a Washington-based think-tank. General Douglas Fraser, head of US Southern Command, has called organised crime fuelled by drug trafficking Central America’s gravest threat.




Few suggest the region is about to become a collection of narco-states where governments are usurped by cartels, though that must be a risk for Guatemala, Honduras and El Salvador, the worst afflicted Central American countries. Most of the economies of a continent once associated with sovereign default and hyper-inflation are booming. While developed countries are mired in high borrowings and slow growth, Latin America has become a motor of the world economy better known for its booming economies than the cocaine trade.

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Drugs


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Even so, most Latin American democracies are young. Mexico, Latin America’s second biggest economy, made its democratic transition just 10 years ago; Brazil, the biggest, barely 25. This makes such nations especially vulnerable to corruption and violence.



At least the days when the US certifiedcountries on the basis of their ability to curb drug production are gone. Marijuana is now California’s largest cash crop, with estimated sales of $14bn a year. Most of the 10,000 illegal methamphetamine laboratories seized worldwide in 2009 were also in the US.


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Even so, the west continues to impose considerable pressure on the region. Latin Americans have compelling reasons of their own to strengthen the rule of law. The economic and political benefits “would be huge”, says Agustin Carstens, head of Mexico’s central bank. The World Bank estimates that crime and violence cost Central America 8 per cent of its gross domestic product.



But many in the region have grown weary of the traditional approach, which focuses on criminalisation and repression but has little to show for it. Indeed, local drug consumption is rising; Latin American cocaine use is now almost equal to European levels, although still half the US rate.



For one, the intensity of the violence that always shadows the trade and attempts to curb it is grotesque: beheading, dismembering and the random slaughter of innocents. El Salvador, the region’s bloodiest country, suffered 71 homicides per 100,000 in 2010, according to national statistics; Brazil, 25. By comparison, the US homicide rate was less than six; Europe less than two.



Second, fighting traffickers puts a strain on countries lacking resources the developed world takes for granted. The continent remains one of the world’s most unequal regions. Even in Mexico, a member of the Organisation for Economic Co-operation and Development, the club of rich nations, the government defines its poverty rate at 46 per cent.



Third, it strains law enforcement institutions beyond their ability to cope. Mexico’s police service has been effectively balkanised by the constitution so that there are separate forces for the country’s 32 states, and for each of its 2,300 municipalities. In some Central American forces, officers have to buy bullets out of their own pockets.


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Many institutions in wealthier nations would struggle when pitted against a highly sophisticated and ruthless transnational industry that, according to UN estimates, generates $85bn of profits annually from cocaine aloneequivalent to six times Coca-Cola’s pre-tax earnings last year.



Fighting corruption and drugs is akin to using an Indian rubber eraser,” says Malcolm Deas of Oxford university, a historian of Colombia who has advised the country’s presidents. “The eraser always gets dirty, and some of it rubs off.”


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Worldwide, recognition is dawning that the prohibitionist policies of the past century have not worked – and, as long as the drugs people want to consume are illegal and therefore supplied by criminal entrepreneurs, they are unlikely to work.



Even the presence of 100,000 of the best-trained soldiers with the most sophisticated weapons has done little to help staunch the flow of opiates from Afghanistan, which accounts for about two-thirds of global heroin production. Bad weather and plant disease did more to reduce supplies last year than any efforts by Nato-led troops or Afghan police.



As for Latin America, the only success story so far is Colombia, and only when judged by falling homicide rates rather than the export of illegal drugs. Furthermore, Bogotá’s success was thanks to conditions unrepeatable elsewhere.




First, there was a large flow of funds from the US. The $6bn spent on the ongoing Plan Colombia anti-narcotics and insurgency aid programme amounts to about 6 per cent of Colombia’s GDP for 2000 (the year the scheme began). By contrast, America’s equivalent initiative in Mexico is worth $1.4bn, less than 0.2 per cent of Mexico’s GDP for 2010.




Second, in the past 20 years Bogotá has made a sustained and near-superhuman effort at the cost of the lives of high numbers of police officers and judges. It has benefited from having a unified police force when it began to tackle seriously the problem of organised crimesomething lacking in many other countries. “If your police forces are scattered, the narcos simply pick you off,” points out General Oscar Naranjo, head of Colombia’s police.




Third, the US and Europe provided on-the-ground training and intelligence in Colombia, which would be unworkable in most of Latin America. When Alvaro Uribe, then Colombia’s president, agreed in 2009 to let the US military use the country’s air bases to help local forces hunt down traffickers, it triggered protests across the region about “Yanquiimperialism. Mexico’s constitution prohibits foreign troops from operating in the country, although a handful of retired US army personnel have recently been deployed there to get round such laws, according to The New York Times.



Finally, even when a crackdown is successful it simply pushes the mayhem into other countries. “The more success we have with interdiction, the more organised crime goes elsewhere,” says Laura Chinchilla, president of Costa Rica.



More and more people, and not just libertarians and hippies, are calling for a radical rethink of drug policy. The US, for example, was able to ignore the worst effects of its problem for many years. In practice the attitude was that, so long as there were not bombs going off or bullets flying in Washington, New York or Los Angeles, the violence did not matter. But in a more globalised world, and with bullets being sprayed around in neighbouring Mexico, Washington increasingly finds itself on the back foot, and confronting the possibility of violence spilling over the border.




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What action it should take is unclear. Devoting more money to the problem is hardly likely, given the state of US finances. Drug use prevention campaigns also have a poor record, despite persistently high expectations. They are “cost-effective but not very effective”, points out UCLA professor Mark Kleiman, author of the recently published Drugs and Drug Policy: What Everyone Needs to Know.



The legalisation debate is bogged down by legitimate fears about the risk of increased addiction rates; it will take years of study before this is better understood.




One promising, and cheap, alternative would be to slow the flow of arms south from the US. Colombian president Juan Manuel Santos recently lamented the fact that disassembled hand guns can be dispatched by Federal Express to his country, where they are pieced back together. In Mexico, as much as 70 per cent of guns seized come from America.




Yet this debate never gets off the ground because of the sensitivity of the issue for many Americans who assert their constitutional right to bear arms. As President Calderón said on a March visit to Washington: “I respect the Second Amendment, but we are requesting: don’t sell weapons to Mexican criminals.”



Some in the region believe that, while they take steps to deal with the problem, the west appears less willing to make sacrifices.


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Mexico, for example, has embarked on police reforms that will require constitutional change to come into effect, while a US ban on domestic sales of semi-automatic rifles that expired in 2004 is yet to be reinstated. Many believe the west has also failed to tackle money laundering. As Carlos Slim, the Mexican telecoms magnate who is the world’s richest man, has observed: “It is unfair that the drug-producing countries get to keep all the problems, and the consumer nations all of the profits”.



There is no silver bullet that can solve the drugs problem. But many in the region feel that the longer western consumer countries fail to take a meaningful role in reducing the extreme violence associated with attempts to curb their citizens’ desire to take illicit drugs, the more it will become apparent that they have blood on their hands. Security forces and traffickers have become embroiled in a kind of “arms race”, as the GCDP report put it. “Break the taboo on debate and reform. The time for action is now.”




GOVERNMENTAL EFFORTS: A war hard to wage when police fail lie detector tests


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At the end of last year, enforcers from a drug cartel swaggered up to the new police station in Los Ramones, a rural area east of Monterrey, Mexico’s leading industrial city, writes Adam Thomson. They pumped more than 1,000 rounds of ammunition into its freshly painted exterior.



No one was hurt. But the message – that organised crime can intimidate authority more or less at will – was both clear and effective. The following day the entire local police force resigned in terror.


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Los Ramones illustrates the difficulties that Felipe Calderón, Mexico’s centre-right president, has hit since he declared war on organised crime in 2006 when he came to office.



Thanks to its federal system, the country has a patchwork of federal, state and municipal security forces, which co-ordinate haphazardly, are generally underfunded and are often so small that they present organised crime with an easy opportunity to bribe and intimidate.



In Guatemala, a country that in recent years has become a principal transit point and logistics base for Mexican drug smuggling organisations, it is a similar story. Álvaro Colom, the leftist president, says he has had to fire at least two national police chiefs on corruption concerns since he took office in 2008.



The Guatemalan army, which is also used to fight organised crime, has been cut in size by 70 per cent since peace accords were signed in 1996. In spite of Mr Colom’s efforts to boost its numbers, it remains ill-equipped to be a credible threat to the cartels’ operations. In a recent interview with the Financial Times, Mr Colom admitted that some of the armed forces’ equipment, such as aircraft and ships, dated from the second world war.



In both Mexico and central America, work to reform security institutions to deal with well-armed drugs cartels has been slow. Attempts to purge forces of corrupt or inept elements often take time because of the sheer number of officials who fail polygraph and other tests.



In the state of Nuevo León, of which Monterrey and Los Ramones form part, the regional government fired 560 officers – about 40 per cent of its force – when the current regional administration took over.



Since then Nuevo León has started a recruitment drive intended to make the force more professional, dignifying the job through higher salaries and perks. Even so, the state still has less than half the roughly 14,000 police it needs to meet the UN standard of three per 1,000 inhabitants.



At the national level, Mr Calderón has had some success. Mexico has taken steps to overhaul its justice system and is gradually moving to more transparent, jury-based trials. He has also increased the number of federal police from some 6,000 in a country of 112m to about 36,000. More than half the top 37 cartel leaders have been killed or captured and record amounts of narcotics have been seized.



But a bill introduced by Mr Calderón to place municipal police under the command of each of the 32 statesseen as important in fighting crime – has met resistance in Congress. Most experts believe it has little chance of approval.



The few successes have, moreover, not come cheaply: in a country where almost half the population lives in poverty, his government has more than doubled the annual security budget in nominal terms to 128bn pesos ($10.4bn). Yet the drugs continue to flow and the violence keeps growing. Mexico’s statistics agency says there were more than 22 murders per 100,000 inhabitants last year; in 2006, there were just eight.



In a stinging reminder of some drug lords’ continuing prosperity, Forbes magazine last year named Joaquín Guzmán, head of Mexico’s Sinaloa drugs cartel, as the 60th most powerful person on the planet. Mr Calderón was not on the list.

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Copyright The Financial Times Limited 2012.

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The Paranoid Style in Chinese Politics

Minxin Pei

17 April 2012
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HONG KONG – Henry Kissinger, who learned a thing or two about political paranoia as Richard Nixon’s national security adviser and Secretary of State, famously said that even a paranoid has real enemies. This insight – by the man who will be known forever for helping to open China to the Westgoes beyond the question of whether to forgive an individual’s irrational behavior. As the scandal surrounding Bo Xilai’s dramatic fall from power shows, it applies equally well to explaining the apparently irrational behavior of regimes.


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Most reasonable people would agree that the world’s largest ruling party (with nearly 80 million members), with a nuclear-armed military and an unsurpassed internal-security apparatus at its disposal, faces negligible threats to its power at home. And yet the ruling Communist Party has remained brutally intolerant of peaceful dissent and morbidly fearful of the information revolution.


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Judging by the salacious details revealed so far in the Bo affair, including the implication of his wife in the murder of a British businessman, it seems that the Party does indeed have good reason to be afraid. If anything, its hold on power is far more tenuous than it appears. Bo, the former Party chief of Chongqing, has come to symbolize the systemic rot and dysfunction at the core of a regime often viewed as effective, flexible, and resilient.


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Of course, corruption scandals involving high-ranking Chinese officials are common. Two members of the Party Politburo have been jailed for bribery and debauchery. But what sets the Bo scandal apart from routine instances of greed and lust is the sheer lawlessness embodied by the behavior of members of China’s ruling elites. The Bo family, press reports allege, not only has amassed a huge fortune, but also was involved in the murder of a Westerner who had served as the family’s chief private conduit to the outside world.


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While in power, Bo was lauded for crushing organized crime and restoring law and order in Chongqing. Now it has come to light that he and his henchmen illegally detained, tortured, and imprisoned many innocent businessmen during this campaign, simultaneously stealing their assets.


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While publicly proclaiming their patriotism, other members of China’s ruling elites are stashing their ill-gotten wealth abroad and sending their children to elite Western schools and universities.


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The Bo affair has revealed another source of the regime’s fragility: the extent of the power struggle and disunity among the Party’s top officials. Personal misdeeds or character flaws did not trigger Bo’s fall from power; these were well known. He was simply a loser in a contest with those who felt threatened by his ambition and ruthlessness.

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The vicious jockeying for power that the party faces during its leadership succession this year, and the public rift that has resulted from Bo’s humiliating fall, must have gravely undermined mutual trust among the party’s top leaders. China’s history of political turmoil, and the record of failed authoritarian regimes elsewhere, suggests that a disunited autocracy does not last very long. Its most dangerous enemy typically comes from within.


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Moreover, the amateurish manner in which the Party has handled the Bo scandal indicates that it has no capacity for dealing with a fast-moving political crisis in the Internet age. While political infighting obviously might lie behind the Chinese government’s hesitancy and ineptness in managing the scandal, the Party undermined its public credibility further by initially trying to cover up the seriousness of the affair.


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After Wang Lijun, Bo’s former police chief, very publicly sought asylum in the United States’ consulate in Chengdu, a city some four hours from Chongqing, the Party thought that it could keep the Bo skeleton in the closet. Using language that would make George Orwell blush, officials declared that Wangsuffered from exhaustion from overwork” and was receivingvacation-style treatment”; in fact, he was being interrogated by the secret police.

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What made the Party’s top brass lose face – and sleep – was the failure of China’s famedGreat Firewall” during the Bo saga. Attempts to censor the Internet and mobile text services failed miserably. Chinese citizens, for the first time in history, were able to follow – and openly voice their opinions about – an unfolding power struggle at the very top of the Party almost in real time.


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Fortunately for the Party, public outrage over the lawlessness and corruption of leaders like Bo has been expressed in cyberspace, not in the streets. But who knows what will happen when the next political crisis erupts?


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China’s leaders, we can be sure, are asking themselves precisely that question, which helps to explain why a regime that has apparently done so well for so long is so afraid of its own people.


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It is difficult to say whether a paranoid with real enemies is easier to deal with than one without any. But, for China’s government, which rules the world’s largest country, paranoia itself has become the problem. Overcoming it requires not only a change of mindset, but a total transformation of the political system.

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Minxin Pei is Professor of Government at Claremont McKenna College.
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Copyright Project Syndicate - www.project-syndicate.org