What's new and scary is that the principal role in channeling funds from savers to borrowers now comes from nondepository institutions such as investment banks, hedge funds, and private equity funds. They invented new ways to slice and dice loans, packaging them as securities that could be sold to investors the world over. But who knew what they were really buying? The securitizers financed assets with a growing volume of credit and with ever higher leverage. In short, the new but opaque pyramids of structured securities enabled the new institutions to lend more against less.

The world was awash not with cash but with credit. The global issuance of credit instruments went from $250 billion to $3 trillion a year. Many of these securities were rated, but last year, the agencies started downgrading billions of dollars of debt they had once deemed safe. Prices tumbled as investors stopped trusting the ratings and stopped buying complex instruments. Financial institutions began to hoard cash and cut back on loans even to other banks. Witness the sharp rise in the London Interbank offered rate—the main measure of banks lending to one another.

Bad timing. The funding crisis meant financial firms were no longer able to turn assets such as subprime mortgages into securities and sell them. These markets became illiquid, forcing securitizers to turn to their banks for help. But that squeezed the balance sheets of the banks at the very moment when banks were facing their own losses on debt securities.

Decisions have been frozen, as no one knows whom to trust. Bank credit has fallen at the fastest rates since the Federal Reserve began collecting weekly figures, as have total bank deposits and money-supply numbers. Issues of collateral debt obligations fell 94 percent between the first quarter of 2007 and the first quarter of 2008. This credit liquidation will continue for a lot longer than most people think, regardless of what the authorities do.

The investment banks, hedge funds, and private equity funds that took on the most risks are the ones facing the possibility of going under. This is exacerbated by the evaporation of trust. The word "credit" derives from the Latin crederi, which means to believe. People stopped believing both in the borrowers and in the new credit instruments. Too many of the investors had no idea of the risks they were exposed to, so now we have a postmodern version of a run on the banks. In the old days, the depositors lined up outside the closed bank doors; today, the money leaves these financial institutions through electronic transmissions. Cash is withdrawn, credit lines are pulled, counterparty risks are unwound, and the result is a freeze up of credit and a downward spiral of asset values, which paralleled what happened during the great bank runs of the 1930s.

The Feds are doing their best, orchestrating a series of ad hoc plans to restore credit in these nondepository institutions. The Feds are right to keep the financial plumbing lubricated by providing liquidity for different kinds of assets, for longer periods of time and to more borrowers, secured not just by fixed income securities but also by equities. But this provision of more aid to more borrowers than ever before is an unprecedented expansion of the role of the Feds.

The speculation did not just begin yesterday. It began with the technology stocks in the 1990s, turned to real estate, commodities, and private equity buyouts in this past decade, and then took over many other financial markets. Now, a significant fraction of the speculative loans that banks made during the boom years are underwater, and the risk of these losses will overwhelm banks that have limited capital to absorb them.

Investors including sovereign-wealth funds have put billions into Citigroup, Merrill , Lehman, and others, only to suffer mammoth losses on these investments, which in turn is causing them to balk at any future flow of equity capital. This raises the prospect that other banks, especially regional and community banks, might fail.

We are into the second year of this credit crisis, triggered by the subprime mortgage disaster. Why hasn't the healing begun? The answer lies in the way leverage works. Banks are not only providing loans to customers, they also use leverage themselves. When they make profits, they borrow more money to make more loans and book still more profits. But for every dollar of bank wealth that they lose, government-regulated commercial banks must eliminate $10 of lending, and for investment banks, the figure may be as high as $30. If the total losses across the credit markets exceed $1 trillion—and some think they will go to $2 trillion—then you have to put on a leverage multiplier of 10 or 15. This kind of gigantic number of more than $10 trillion poses a systemic risk that could drag many financial institutions down and take years to work through the system.

The problem is the financial markets and firms are interconnected with increasingly complicated securities such as credit default swaps and money market instruments such as repos. The failure of one firm can send ripple effects through the whole system, but the market and regulators have limited experience in how to handle such a crisis.

Credit drought. Today, the challenge is to build a new sense of trust in finance, as well as to rebuild equity. That makes it hard to predict when the credit crunch will end and how big the losses may be. This crunch is much more serious than in 1987, when the crash was confined to the equity markets and over within a few weeks. This one has greater scope to harm the real economy: Without credit, business dries up.

Lower economic growth in turn makes things worse in the financial markets. It is affecting not only housing but autos, credit cards, commercial mortgages, commercial and industrial activities, and the leveraged buyout loan markets. Without credit, the domestic private economy cannot generate profits, and without solid profits the health of lenders and the availability of credit will deteriorate even further.

Are we going to have an October surprise, an attack on Iran by either the Bush administration or by Israel to stop the regime from becoming a nuclear power?

It could happen - and alter the dynamics of the presidential race in the blink of an eye - but only if Israel pulls the trigger. Don't expect the United States to drop bombs anytime soon. The reason: Iran has us over a barrel.

According to Britain's Guardian newspaper, Bush earlier this year nixed an Israeli plan to attack Iran's nuclear facilities. Reportedly, the President said no because we couldn't afford Iranian retaliation against our troops in Iraq and Afghanistan or Iran closing down Persian Gulf shipping. Nonetheless, cynical speculation is now swirling in some quarters that with the financial collapse working against McCain - and Bush's legacy coming into focus - the President might reconsider. Could that tail really wag the dog?

Probably not. The fundamental global power dynamics have not changed. Iran has successfully blackmailed us. Iranian Silkworm missiles could close down Gulf oil exports in a matter of minutes, taking about 17 million barrels a day of oil off world markets. Americans could suddenly be looking at the prospect of $10-$12 for a gallon of gas. If the collapse of Wall Street doesn't push us into a depression, that would. And Bush is right: An angered Iran could punish us with thousands of extra casualties in Iraq and Afghanistan, as Iranian-trained, armed and funded fighters flow back into the war zones with a vengeance.

So, giving the go ahead to Israel would just not be worth it.

But none of this changes the fact that Israel - on its own, without U.S. complicity - is moving closer to a decision to attack Iran, almost by the day.

What many Americans miss is that Iran is a threat to Israel's very existence, not an imagined danger used by politicians for political advantage. Every Israeli city is within range of Iranian/Hezbollah rockets. To make matters worse, since the July 2006 34-day war, Hezbollah may have as much as trebled the number of rockets it has targeted on Israel.

Meantime, Hezbollah has become the de facto state in Lebanon. And lest we forget, Israel lost that July 2006 war to Hezbollah, pulling its troops out of Lebanon without having obtained a single objective. In other words, Israel no longer has its deterrence credibility, the fear that it can decisively retaliate against its enemies.

Israel knows that international diplomacy against Iran up until now has been a farce. Iran called Bush's bluff, ignored sanctions and continued its nuclear program with impunity. And if the Israelis needed another psychological kick in the pants, last week North Korea announced that it is back to building a bomb, likewise with impunity.

Finally, Israel has to calculate that American influence around the world is on the wane. Americans are tired of the wars in Iraq and Afghanistan. And now, after the war in Georgia, Russia is opening up its flow of weapons to Iran.

Couple all of this with Israel's suspicion that Iran is within only a few short years of having a nuclear bomb, and Israel knows time is not on its side. It is starting to believe that it has no choice but to change its fortunes with arms.

This much is certain. Whether the President is named Bush, McCain or Obama, he will either have to prepare for war in the Gulf or find a way to bring Iran back into the nation-state system. The day of reckoning is near.

I myself think a deal can be cut with Iran. During the last 30 years, Iran has gone from a terrorist, revolutionary power to far more rational, calculating regional hegemon. Its belligerence today has more to do with a weakened United States and Israel than with any plans to start World War III.

The question is what price Iran would exact for a settlement. Or more to the point: Would we prefer to take our chances with an Israeli surprise?

Baer, a former CIA case officer, is author of the just-released "The Devil We Know: Dealing with the New Iranian Superpower."

In October of 1944, as Hitler was planning his breakout to Antwerp--his last ditch effort to defeat the allied forces--his main problem was how to secure the bridges between Ardennes and Antwerp. To this end, he called upon one of the most dangerous men in Europe, SS Lt Col Otto Skorzeny. Hitler told Skorzeny that he wanted to paralyze the allies long enough to finish developing his terrible weapons that he planned to use against the Allies and therefore win the war.

Hitler ordered Skorzeny to organize and train 3000 loyal brave men to infiltrate the Allied lines and, dressed in American Army uniforms, disrupt the Allied reaction to the German push through the Ardennes. These men would act as spies, saboteurs and spreaders of demoralization. They were to seize and hold the bridges over the Meuse for the main body to cross.

Within two months, Skorzeny’s men were ready. He had taught them how to act American, how to open a pack of cigarettes the American way, how to swear, and how to act “un-militarily”—no heel clicking when coming to attention. They then brazenly entered the American lines with stolen American jeeps and began their secret operation to disrupt and destroy.

There is enough recorded history to show that these men were successful in their operation, directing convoys the wrong way, spreading rumors and lies to demoralize the American GI, even causing Eisenhower’s staff to seclude him for ten days against the possibility of assassination. 

In the end, however, the whole operation became known to American leadership and the Americans searched everyone they were suspicious of. Some of Skorzeny’s men were killed in battle and some were captured. It is not know how many were killed in battle but we do know what happened to 130 of them that were captured and imprisoned. On Dec 22, 1944, all 130 were brought before First Army tribunal and found guilty of “violating the laws of war in wearing the enemy’s uniform behind his lines to deceive and commit espionage and sabotage.” All 130 were executed by firing squad after the trial.

That’s how you deal with the enemy within your borders.

For politicians and other editorialists to continually refer to  9/11 as a "tragedy"  is to relegate the incident to the annals of history like the Johnstown Flood, hurricane Andrew, earthquakes etc.

It is important to understand that words have as much subtle meaning as they do definition.  The definition of a tragedy is “a disaster, either nature caused or human caused."  I submit that I am not arguing that the results of the attack on the twin towers were not disastrous, but I am saying that the term “tragedy” evokes more than that.  It emphasizes the "unfortunate-ness" of the incident.  The word "tragedy" evokes sympathy for the victims, rather than outrage at this attack upon our soil. The picture evoked when a speaker uses the word tragedy is one of “we are so sorry that this happened,” or “ This was so unfortunate”.  For example, I don't think the american public saw the attack on Pearl Harbor as a tragedy.

The twin tower attack was an attack by our enemies on American soil and we act like it is a tragedy. We should act like we were attacked. Even to this day, people speak with sorrow and unhappiness that this happened. Where is the rage and the anger at our enemies. They declared war on us and we cowered down and talked about memorials to the victims.

How pathetic is that.

In the 70’s I taught a unit within my Social Studies classes called “Ethics and Morals”. The object was to present to students true real-life ethical dilemmas so that lively discussions of right and wrong could take place. The primary purpose was to help young adults discover their own ethics and morals by arguing with others and defending their opinions. For example, one of the cases we studied was the Kitty Genovese murder.

However, one particular story within the unit that has always stayed with me over the years was the true story of the killing of an immigrant that took place on the streets of Chicago in the 1960s. The story involved the brother of a woman who had been wronged by her fiancé back in the “old country”. The brother followed the fiancé to the Chicago immigrant ghetto and shot him as he got off the subway. In the story, the neighborhood old folks called it an “honor” killing, and said it was completely acceptable. That’s the way we do it back in the “old country”, they said.

This story has always stayed with me because as I moved out of the classroom and into college administration, I ran into the Diversity, Multiculturalism and Political Correctness forces. These forces were passionate that everyone’s culture be respected by everyone else. Upon first hearing a dean say that everyone who is from a different culture deserves to have that culture respected, I asked the dean if we were to respect the cultures that believe in the sanctity of “honor” killings. Are we to respect the cultures that enslave women, I asked. The answer was always the same—any actions in violation of our own laws would not be tolerated. Therefore, the dean said, anyone doing an “honor” killing in this country should be arrested and brought to trial for murder. (There was, however, no discussion on whether I should respect “honor” killings that take place back in the home country)

Obviously that did not answer my question—that being “Must we respect a culture that goes against all human decency—cultures that promote honor killings, the stoning of women, human slavery, easy divorce for men (saying I Divorce You three times)and no divorce for women, child abuse and female circumcision?” To me, the answer is No, we do not have to respect that culture, not now, not ever. And the forces of Multiculturalism and Diversity be damned for telling me to.

Over the years I have tried to understand how a freedom loving nation such as ours can maintain political correctness attitudes towards those who practice such inhumane rituals. I have decided that the reason is that the Woodstock Nation that is generally responsible for all our “feel good” rules, has never grown up—they have lived in Never Never Land for much too long. The hippies of Woodstock may have cut their hair and changed their clothes, but their view of the world has not changed—As Ray Stevens wrote and sang--“Everybody’s beautiful, in their own way”. And since everybody’s beautiful in their own way, then everyone must be respected. 

John Cullen reported the situation to his commander and subsequently to the FBI. Acting on this information and working quickly and efficiently all the men in “Operation Pastorious”, the code name of the German invasion of America designed to disrupt our industrial capabilities, were captured.

FDR ordered that a military commission hear the case. This was the first such tribunal to be convened since the assassination of Abraham Lincoln in 1865 and was conducted in the strictest secrecy. The prosecution team was headed by Attorney General Francis Biddle and the Army’s Judge Advocate General Myron Cramer. 

The trial took one month and all men were found guilty. Two were sentenced to prison, one for thirty years, and one for life. The other 6 were sentenced to the electric chair, a sentence that was carried out at noon the day of their sentencing.

When the nation is at war, the capture of enemy combatants must be dealt with swiftly and judiciously. Anyone found attempting acts of war within our borders must be dealt with exactly as FDR did.

It was the winter from hell. Temperatures below zero, snow up to the men’s knees and blinding snow storm blizzards. It was, by all accounts, the worst winter in Europe in centuries. To make matters worse, January 1945, had been one of the worst months of fighting that the European Theater had seen. The Allied Army, after being caught by surprise and losing ground to Hitler’s forces in the Battle of the Bulge had fought back to regain all the ground that had been lost. Slowly, yard by freezing yard, they had taken back land that had already been won, two months ago, and then lost. Finally at the end of January they stood on the edge of Germany, right up against the Siegfried line.

It had been horrifyingly hard work--sleepless 20 below zero nights with inadequate protection from the cold, exhausting assaults through knee-deep crusted snow against massive light arms and armored resistance, hand to hand combat in many cases, and then the impossible task of digging into the frozen ground to hunker down for another sleepless night before doing it all again the next day.

It was an offensive strategy that Eisenhower, Bradley and Patton all believed in so strongly that against all human reasonableness, they pressured the men beyond belief to perform acts of extreme heroism, courage, commitment, that lesser men would have given up on long ago. Why Eisenhower did this is a lesson to us today that we must understand.

There is no doubt that Eisenhower could have stopped his offensive assaults when he hit the Siegfried Line. A massive protective barrier, it gave the Germans the cover they needed to regroup. No reasonable military person would have thought it wrong to stop the offense, rebuild the lines, replace the tired, hungry and freezing veterans with new blood, and strengthen the weak spots in preparation for a spring final assault upon Germany. But Eisenhower had played football and everyone that has ever played the game knows the one hard and fast rule…The best defense is a good offense!!  And so, with exhausted men, in icy cold conditions, he ordered the offensive assault on the Siegfried Line.

It was Patton that said it best—“In war, the only sure defense is offense, and the efficiency of offense depends on the warlike souls of those conducting it.”  And so the American army slogged forward, bone tired, famished, battle weary and frozen, and eventually pushed the Germans all the way back to Berlin.

Today, in the war on terror, it would be good to know that our commander-in-chief and our military leaders all know and understand this principle. It would be even better for our safety and security if the American public knew this and believed in it. If they don’t, we are in for failure after failure in our attempts to defeat the terrorists until such time as someone comes along who does believe in it and crushes the terrorists in an overwhelming offense. 

So instead of chanting “Defense, Defense” as the fans do at football and basketball games, we need to start chanting—“Offense, Offense!!!  If we don't, prepare to lose ground to the terrorists....

In 1758, British and Colonial provincials made a major error in their first assault upon Fort Carillon (later renamed Ticonderoga by the British), a French held fort on the waterway entrance from New York to Canada.  Although the British forces greatly outnumbered the French forces 16,000 to 4,000, the French forces won the battle that day.  General Sun Tzu would have loved the battle because one of the major reasons that the British lost was one of Sun Tzu’s favorite principals. 

Sun Tzu, if you do not already know, was a Chinese general that lived 2,500 years ago and wrote the manual—“The Art of War”—a manual read around the world by military organizations.  In it Sun Tzu outlines several principals that are generally recognized as necessary to win a war.  One of those states, “All warfare is based upon deception”. 

If only the British commander, General James Abercrombie, had read the manual before the battle, he might have been more successful.  But apparently he had never heard of Sun Tzu.  However, the French commander, Louis-Joseph de Montcalm, whether he had read Sun Tzu or not, applied the principal of deception with wondrous results.

Knowing the British would send scouts (spies) to watch the fort preparations, Montcalm skillfully hid the main fortifications from view and created what looked like to the British scouts to be a flimsy half hearted weak fortress. With the British scouts looking down on the busy French forces, Montcalm ordered all his men to look busy building the weak fortress.

The scouts brought the word back that the fortress was weak and vulnerable. Abercrombie sent more spies to check it out and they reported back with the same information. Acting on this information, and unaware that there was not only a strong impenetrable fortress hidden in the woods, but also a horrible array of fallen timbers with sharpened points hidden in front of the deception, Abercrombie ordered the assault. 

Historians note that Abercrombie lost the battle because he lost control of his forces and the attack was badly managed. However, the real reason he lost was his poor intelligence reports.

Let’s hope that American military experts have heard of Sun Tzu and are fully aware that the enemy has heard of him also.

I think Charles Krauthammer and Mort Zuckerman are two of the most, if not the most, intelligent thinkers and pundits writing today. I think they are dead-on correct in almost everything they write.