'Banker' who lends to the poor wins Nobel Peace Prize

By Philippe Naughton

Comment: a truly inspiring choice

 The inspirational economist Muhammad Yunus was awarded the Nobel Peace Prize today for helping lift millions of his fellow Bangladeshis from poverty through a pioneering scheme that lends tiny amounts of money to the very poorest of borrowers.

Professor Yunus shares the prize, and the cheque for 10 million Swedish Kronor (£730,000) that accompanies it, with the Grameen Bank, which he founded after the Bangladeshi famine of 1974 and whose micro-credit model has since been copied in dozens of countries around the world.

The bank, which is owned almost entirely by its own borrowers, has lent out some £2.9 billion to more than 6 million Bangladeshis, 96 per cent of them women. Even though its borrowers are not asked for collateral, more than 98 per cent of the money is repaid.

The Norwegian Nobel Committee, which awards the Peace Prize, cited the economist and his bank for their efforts in helping to "create economic and social development from below".

It added: "Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights.

"Muhammad Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries.

"Loans to poor people without any financial security had appeared to be an impossible idea. From modest beginnings three decades ago, Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty. Grameen Bank has been a source of ideas and models for the many institutions in the field of micro-credit that have sprung up around the world.

"Every single individual on earth has both the potential and the right to live a decent life. Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development."

Muhammad Yunus was borning in Chittagong in 1940 and studied economics at Dhaka University before taking his PHD at Vanderbilt University in Tennessee, where he went as a Fulbright scholar.

He returned to Bangladesh to become an economics professor at Chittagong University, where he first experimented with micro-credit after the 1974 famine.

The first loan he made came from his own pocket when he $27 to a group of women who made bamboo furniture in a village near Chittagong. That allowed the women - who borrowed money at usurious rates to buy the bamboo - to break out of a cycle of debt and create a profitable business that could support their families.

The Nobel Committtee particularly praised them for having focused on female borrowers, which was also a pioneering concept.

"Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions," it said.

"Economic growth and political democracy can not achieve their full potential unless the female half of humanity participates on an equal footing with the male."

The citation concluded: "Yunus's long-term vision is to eliminate poverty in the world. That vision can not be realised by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play a major part."

The Nobel Peace Prize was first awarded in 1901. It was won last year by the International Atomic Energy Agency and its Egyptian head, Mohammed ElBaradei.

By YONI MISHAL
From the August 10, 2006 issue | Posted in International

A Brief History of Zionism

By A.K. GUPTA
From the August 10, 2006 issue | Posted in Columns

• Fairy Tale # 1: The U.S. economy will have a soft landing: according to this tale, U.S. growth will continue at its trend rate of 3.5% (as recently argued by Bernanke) or just below trend, around 3.0% (i.e. the Fed staff and the market consensus view).

• Fairy Tale # 2: If the U.S. slowdown is excessive, inflation will ease and the Fed will come to the rescue with a sharp cut of the Fed Funds rate in the fall. I.e. a reduction in interest rates will prevent a recession from occurring.

• Fairy Tale # 3: Even if the U.S. slows down, the world will "decouple" (to use Goldman Sachs' term) from the U.S slowdown and will keep on growing at a perky rate in Asia, Europe, emerging markets and Latin America. In JP Morgan's terminology, this "decoupling" is termed as the "rotation in global growth", from U.S. to Asia and Eurozone. Others refer to it as the "locomotive switch” with a switch in the global growth locomotive from the sputtering U.S. one to the perky ones in EU and Asia.

• Fairy Tale # 4:  The rebalancing of global current account imbalances is underway and will be orderly rather than disorderly: the Bretton Woods 2 regime of vendor financing of the US twin deficits will continue unabated; and any possible fall in the US dollar will be orderly and gradual.

• it directly reduces aggregate demand (residential investment will fall at an annualized rate of 15% for the next few quarters);
• it has a strong direct (wealth) effect and indirect (via Home Equity Withdrawal) effect on consumption;
• it reduces employment as 30% of the growth in payrolls in the last few years was directly or indirectly due to housing.

1. In 2000 the Fed stopped tightening in June 2000 (after a 175bps hike between June 1999 and June 2000). That early pause/stop did not prevent the economy from slowing down from 5% plus growth in Q2 2000 to 0% growth in Q4 2000. Also, the Fed started to aggressively ease rates – in between meetings in January 2001 – when it dawned on the FOMC that they had totally miscalculated the H2 2000 slowdown (they were worrying about rising inflation more than about slowing growth until November 2000 when it was too late). And this aggressive easing in 2001 did not prevent the economy from spinning into a recession by Q1 of 2001. This time around you will get into the same patterns: today’s 5.25% Fed Funds rate reflects the effects on the economy of a Fed Funds rate closer to 4% given the lags in monetary policy and the effects of tightening in the “pipeline” as Bernanke and Yellen put it. So, pausing or stopping now will not help (like the June 2000 pause/stop did not help) and easing in the fall will be too late, in the same way in which easing in early 2001 did not help.
2. The current slump in housing will have a much more severe effect on the economy than the tech investment bust of 2000 for several reasons. The wealth effect of the tech bust was limited to the elite of folks who had stocks in the NASDAQ. The wealth effect of now falling housing prices affects every home-owning household.  The link between housing wealth rising, increased home equity withdrawal (HEW) and consumption of durable and non durables is very significant (see RGE’s Christian Menegatti brief on this), much more than the effect of the tech bubbles of the 1990s. This is exactly what San Francisco Fed President Yellen worried about in her speech last week. Last year, out of the $800 billion of HEW at least $150 or possibly $200 billion was spent on consumption and another good $100 billion plus went into residential investment (i.e. house capital improvements/expansions). It is enough for house price to flatten – as they started to do recently – let alone start falling as they are doing now since they are beginning to fall in major markets – for the wealth effect to disappear, the HEW dribble to low levels and for consumption to sharply fall.
3. A housing slump is a triple whammy for the economy. First, the 6.3% fall in residential investment in Q2 will be followed for the next few quarters by a much larger fall, at least 10% and possibly 15% in such investment. Second, the effects on consumption of housing will be severe: already in Q2 durable consumption is falling as falling home purchases lead to lower purchases of furniture, home appliances and other housing-related durable goods. Third, the employment effects of housing are serious; up to 30% of the employment growth in the last three years was due – directly or indirectly – to housing. As housing slumps, the job and income and wage losses in housing will percolate throughout the economy.
4. Could a Fed pause and easing rescue the housing sector? Of course not,  for the same reasons why the Fed pause and easing in 2000-2001 did not rescue the collapse in investment in the tech sector. The reasons why the Fed cannot rescue housing are clear. First, Fed policy in 2001-2004 fed an unsustainable housing bubble in the same way in which the Fed policy in the 1990s fed the tech bubble. Now, like then, it payback time: with huge excess capacity in housing (then in tech capital capacity) even much lower short and long rates will not make much of a difference to housing demand. Real investment fell by 4% of GDP between 2000 and 2004 in spite of the Fed slashing the Fed Funds rate from 6.5% to 1.0%. Does anyone believe that a 50bps or even 150bps easing by the Fed will undo the housing investment bust that is coming in the next two years? No way.Second, a Fed easing in the fall may be too small – at most 50bps plus or minus 25pbs – and will have too little of an effect on long rates to affect debt servicing ratios of overburdened households. Long rates will not be affected much by a Fed ease for the same reasons – the global conditions that determined the “bond conundrum” of 2004-2005 – that a Fed tightening did not affect long rates. Some easing by the Fed will have a little downward effect on long rates and, if inflation is actually rising because of oil and other stagflationary shocks, long rates may actually go up if the Fed easing likely causes increases in long term inflation expectations. Since we are facing stagflationary shocks, the Fed can ill afford to ease too much and too much easing will be counterproductive for bond rates and for housing.  Thus, either way households burdened with ARMs and overburdened with housing debt at the time when housing values are slumping, can expect little relief from lower short  rate or long rate. The Fed just cannot rescue housing; it can only very modestly dampen its free fall.
5. With aggregate demand slumping for structural reasons that I have extensively discussed before, Fed easing and lower long rate will have very little, if any effect, on private consumption of non-durables and durables (the latter already falling in Q2), non-residential investment (that is already falling in Q2 in its equipment and software component) and residential investment.

1. Trade links are important in transmitting shocks from the US to the rest of the world, especially for countries that export a lot - directly or indirectly - to the US (China, East Asia, Mexico, Canada, etc.)
2. The oil and commodity price shock is a shock that is common to the US and many other oil and commodity importing countries; actually EU, Japan, China, India depend on oil imports more than the U.S. does.
3. Monetary policy is being tightened in the US and many other economies given global concerns about rising inflation. The era of cheap liquidity is over. See ECB, BoE tightening decisions today and the end of ZIRP in Japan, as well as the recent spate of policy hikes throughout the EM world.
4. Housing bubbles are bursting - or flattening - not just in the US (where the bust is becoming dramatic lately) but also in many other economies as easy liquidity had led to housing bubbles in many parts of the world.
5. The recent fall in equity prices - during the May-June turmoil and the coming one once the U.S. slowdown dawns on Panglossian investors - will not be just US based; it will rather global and more severe in the rest of the world than in the US as foreign markets are more illiquid than the U.S. one (see what happened to EM equities and to the Nikkei and EU stocks in May-June); it will thus have negative effects on global consumption and investment spending and on business and consumer confidence in many economies.
6. The weakening of the US dollar following the US slowdown will lead - and is already leading - to the appreciation of the Euro, Yen and other floating currencies. Given the tentative recovery of the Eurozone and Japan, this appreciation will hurt net exports and growth.
7. Foreign direct investment (FDI) is another channel of transmission: when the US slows down the sales in the US of US-producing affiliates and subsidiaries of foreign firms fall,  negatively affecting the profits of such firms in their home base in Japan, Europe and around the world.
8. Risk aversion rose globally in May-June and investors are still a nervous wreck given all the macro, financial and geopolitical uncertainties in the world; thus the downturn in markets will negatively affecting "animal spirits", i.e. business and consumer confidence. Already the mood of global CEOs has totally soured based on the Goldman Sachs confidence index.
9. The US and G7 slowdown will have negative growth and financial effects on emerging market economies that, until recently, had widely benefited from high global growth, high commodity prices and low global interest rates. Lower global growth, lower commodity prices and reduced global liquidity will have negative effects of the real economies of emerging markets, as the May-June sharp market selloff in these markets had been already signaling.
10. The last four global recessions have been characterized by an oil shock and an inflation scare that led to monetary tightening and stagflationary outcomes. The same is happening this time around and global business cycles are highly correlated.
11. There is now a serious risk of a systemic financial crisis - as in the 1987 stock market crash or the 1998 LTCM near collapse. The factors that led to systemic risk in previous episodes of systemic financial distress are present again today.
12. Unlike the 2001 global downturn there is little room for monetary and fiscal policies to be eased to deal with the global slowdown; while exchange rates are now a zero sum game as, in a slowdown, most G7 economies will want to avoid an appreciation of their currencies. Thus, the risks of trade and asset protectionism are rising in a global economy with large and increasing global imbalances and geostrategic risks.

• Fairy Tale # 1: The U.S. economy will have a soft landing: according to this tale, U.S. growth will continue at its trend rate of 3.5% (as recently argued by Bernanke) or just below trend, around 3.0% (i.e. the Fed staff and the market consensus view).

• Fairy Tale # 2: If the U.S. slowdown is excessive, inflation will ease and the Fed will come to the rescue with a sharp cut of the Fed Funds rate in the fall. I.e. a reduction in interest rates will prevent a recession from occurring.

• Fairy Tale # 3: Even if the U.S. slows down, the world will "decouple" (to use Goldman Sachs' term) from the U.S slowdown and will keep on growing at a perky rate in Asia, Europe, emerging markets and Latin America. In JP Morgan's terminology, this "decoupling" is termed as the "rotation in global growth", from U.S. to Asia and Eurozone. Others refer to it as the "locomotive switch” with a switch in the global growth locomotive from the sputtering U.S. one to the perky ones in EU and Asia.

• Fairy Tale # 4:  The rebalancing of global current account imbalances is underway and will be orderly rather than disorderly: the Bretton Woods 2 regime of vendor financing of the US twin deficits will continue unabated; and any possible fall in the US dollar will be orderly and gradual.

• it directly reduces aggregate demand (residential investment will fall at an annualized rate of 15% for the next few quarters);
• it has a strong direct (wealth) effect and indirect (via Home Equity Withdrawal) effect on consumption;
• it reduces employment as 30% of the growth in payrolls in the last few years was directly or indirectly due to housing.

The growing awareness that we are not going to have a soft landing but a severe recession is now clearly spreading among economist, market folks and, even, some policy makers. Last week, super-blogger and leading macroeconomist Brad Delong warned of a recession and even a possible "meltdown". Today, Paul Krugman in the New York Times picks up the theme with the subtle headline "Intimations of Recession" and the not-so-subtle concerned text starting with "Suddenly people have started talking seriously about a possible recession. And it’s not just economists who seem worried." Also today, the Financial Times is covering the wide-ranging debate in the blogosphere on my recession call.  While Rich Miller on Bloomberg headlines with "

U.S. Trade Deficit Narrows Slightly

Filed at 12:57 p.m. ET

WASHINGTON (AP) -- America's trade deficit improved slightly in June as record sales of U.S. farm products and other exports blunted the impact of soaring crude oil prices.

The deficit for June dipped 0.3 percent to $64.8 billion, which was still the fifth largest deficit on record. The imbalance in May was revised to $64.97 billion, $1.1 billion higher than the initial estimate a month ago as late data showed bigger shipments of oil and consumer goods than originally reported .

Through the first half of this year, the deficit is running at an annual rate of $768 billion, putting it on track to surpass last year's record of $716.7 billion. Democrats hope to use the worsening trade deficit to attack Bush administration trade policies and argue that a tougher approach is needed, particularly with countries such as China.

In other news, the number of newly laid off workers filing claims for unemployment benefits rose by 7,000 last week to 319,000, a bigger gain than economists had been expecting.

The deterioration in the deficit this year is largely a result of soaring global oil prices, reflecting increased tensions in the Middle East and higher demand from developing countries such as China.

For June, the average price for a barrel of imported crude oil hit an all-time high of $62.04, pushing total crude oil imports to a record high of $20.5 billion. All petroleum imports, reflecting crude and refined products, totaled $27.3 billion, the second highest level on record after May's $28.3 billion.

America's foreign oil bill is expected to rise even more in coming months, reflecting the fact that crude oil has been trading above $75 per barrel in recent days as markets respond to the deteriorating security situation in Iraq and the outbreak of fighting in Lebanon.

For June, the smaller deficit reflected the fact that U.S. exports rose a solid 2 percent to total a record $120.7 billion, a manifestation of record sales of American farm products and strong gains in other areas.

Imports also rose to a record of $185.5 billion, an increase of 1.2 percent, as shipments of consumer goods set a record and auto imports climbed to the second highest level on record.

The politically sensitive deficit with China increased by 11.9 percent in June to $19.7 billion as U.S. exports to China fell by 4.3 percent while imports of Chinese products into the United States rose by 8.1 percent. The import gains were led by big increases in clothing and computers.

So far this year, the deficit with China is running 13 percent above the pace set last year, when the imbalance hit $202 billion, the highest ever recorded with a single country.

That soaring deficit has raised complaints in Congress where key lawmakers are pushing a bill that would impose 27.5 percent tariffs on all Chinese products coming into the United States unless the country moves more quickly to allow its currency to rise in value against the dollar.

American manufacturers contend that the Chinese yuan is undervalued by as much as 40 percent, giving the country a trade advantage by making Chinese goods cheaper in comparison to U.S. products. Treasury Secretary Henry Paulson has pledged to keep pressing the Chinese to revalue their currency but so far Chinese officials contend that they must go slowly to avoid disrupting their economy.

U.S. exports with many parts of the word have been rising in recent months as American companies are benefiting from a pickup in global economic growth.

U.S. exports to the 25-nation European Union and to South America and Central America set all-time highs in June while exports to Japan climbed to the highest level since March 2001.

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 New York Times July 24, 2006

Global Trade Talks Are Halted as U.S. and European Union Fail to Agree

By TOM WRIGHT and STEVEN R. WEISMAN

GENEVA, July 24 — Negotiations aimed at reaching a new global trade agreement collapsed today, dealing a blow to the Bush administration’s international economic agenda and touching off a bitter new round of recriminations between the United States and Europe over farm trade barriers.

After two days of discussions, the director general of the World Trade Organization, Pascal Lamy, formally suspended the talks. American trade officials said there appeared to be little prospect of resuming the talks any time soon, probably dooming the chances of a trade accord during President Bush’s remaining time in office.

Negotiators had earlier said that if the outlines of an agreement were not secured by late this month, it would be nearly impossible to negotiate a trade-expanding agreement in time for the United States Congress to vote on it by the middle of next year. President Bush’s authority to negotiate a trade deal and have it put to an up-or-down vote without amendment in Congress expires then.

The failure of the talks was particularly embarrassing because, just last month at a summit in St. Petersburg, Russia, President Bush and other world leaders all called for a redoubled effort to make concessions and break the impasse that has paralyzed trade talks for years.

The two top American negotiators in Geneva — Susan C. Schwab, the United States Trade Representative, and Mike Johanns, the Agriculture Secretary — said they were deeply disappointed by the suspension of the talks, but they recognized that Mr. Lamy had no choice, because there had been no convergence among the parties.

“Unless we figure out how to move forward from here, we will have missed a unique opportunity to help developing countries and to spur economic growth,” Ms. Schwab said. “There was no package on the table that we could have recommended to the President or to the United States Congress.”

Ms. Schwab and Mr. Johanns said that they came to Geneva prepared to make further concessions on agriculture tariffs and what are called trade-distorting subsidies, which protect farmers from overseas competition, but they said that the European Union and some developing countries failed to make similar offers.

Ms. Schwab said in a telephone conference call with reporters that when American officials added up the latest European market-access proposals for farm products, “it became quite clear that there was no there there.”

Mr. Johanns added: “There are no negotiations planned in the future. This round has been suspended.”

But European negotiators declared that it was the United States that had been intransigent. They said that the Americans failed to recognize that the European Union had gone through a series of painful cuts in tariffs and subsidies for their own farmers, and had not matched those steps with fresh concessions.

“Unfortunately the Americans were not able or willing to do their part,” said Peter Mandelson, the chief European Union negotiator. “They preferred to stand still.”

The latest round of global trade negotiations has been sputtering almost since it was begun in 2001 in the city of Doha in Qatar. At the outset, negotiators were hoping to make the talks a centerpiece of the wealthy industrial countries’ commitment to helping the poor countries of the world expand their exports.

The talks became known as the “Doha Development Round” because of their focus on alleviating poverty in countries with goods to sell to Europe, the United States and other wealthy parts of the world. In all, 149 countries were involved in the negotiations, but they tended to be break into blocs of countries with similar interests.

In theory, the wealthy countries were hoping to gain greater access to poorer countries for their manufactured goods and some services, like insurance, in exchange for allowing the poorer countries to export more easily to them.

But the talks foundered over barriers to agricultural trade, not only in Europe and the United States but also among the “top tier” of advanced developing countries, like India and Brazil, which have resisted farm imports because of widespread disquiet among their farmers. This summer, for example, some Indian farmers have publicly committed suicide over their inability to sell their produce at high prices.

Most of the tension was between Europe and the United States, however. Last October, the Bush administration proposed a sweeping set of cuts in both tariffs and subsidies and called on the Europeans to do the same. The Europeans responded with a package of cuts that the United States deemed insufficient.

Trade deals have a history of rough going in Congress, and the Bush administration concluded that it could not get approval for a trade deal unless American farmers could be certain that they could win much greater access for their products in Europe and in India, China and other countries.

The United States offered to cut spending on farm subsidies to $19.7 billion from $47.9 billion now. But European officials said that those figures were misleading and that the United States offer was actually much smaller than that.

President Jacques Chirac of France said about a week ago that the European would not consider further concessions unless the United States agreed to still deeper cuts in farm subsidies.

After the Group of 8 summit in St. Petersburg, Russia, Mr. Lamy held what American officials said was a “confessional” round of talks, in which he asked each party to “confess” privately what it would offer hypothetically if other parties were more forthcoming in their concessions.

The Bush administration was stymied, American officials acknowledged, because the farm bloc in the United States had become so distrustful of other nations’ protectionist practices that they told American officials they could not support a trade deal that did not win them much greater market access.

In June, 57 senators from both parties wrote to President Bush, demanding that the United States make no further offers to lower American barriers until further changes came from Europe.

“An unbalanced proposal that asks U.S. agriculture and rural communities to give more while getting less in market access is unacceptable,” the senators said.

Farm organizations sent the president a similar letter.

Trade officials said these letters reflected the political reality in the United States: that a trade deal would not be approved by lawmakers if it was what they called a “Doha lite” accord, with only limited lowering of barriers on all sides.

Ms. Schwab said today that despite those political constraints, she and Mr. Johanns came to Geneva over the weekend and told Mr. Lamy privately what the United States would do if the Europeans were more forthcoming.

Though only Mr. Lamy knew all the details of what the United States and the Europeans had offered, Ms. Schwab said, it was clear that the gap between the two sides was so great that continuing the talks would be futile.

“When we talked to Lamy yesterday, as things started getting pretty rocky, he acknowledged that it would not be useful for the U.S. to put its flexibilities on the table at this point, because they would be pocketed and there would not be convergence,” Ms. Schwab said.

Steven R. Weisman reported from Washington for this article, and Tom Wright reported from Geneva. Brian Knowlton contributed reporting from Washington.

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July 6, 2006

News Analysis : Few Good Choices in North Korean Standoff

By DAVID E. SANGER

The Bush administration has tried to ignore North Korea, then, reluctantly, to engage it, and then to squeeze its bankers in a manner intended to make the country's leader, Kim Jong Il, personally feel the pinch.

Yet none of these steps in the past six years has worked. So now, after a barrage of missile launchings by North Korea, President Bush and his national security advisers found themselves on Wednesday facing what one close aide described as an array of "familiar bad choices."

The choices have less to do with North Korea's newest missile — which, as Mr. Bush pointed out on Wednesday, "didn't stay up very long and tumbled into the sea" — than with the bigger question of whether the president is prepared to leave office in 2009 without constraining an unpredictable dictator who boasts about having a nuclear arsenal.

"We're at the moment when the president has to decide whether he wants an unconstrained, nuclear North Korea to be part of his legacy," said Jonathan D. Pollack, a professor of Asian and Pacific studies at the United States Naval War College who has spent much of his career studying North Korea and its improbable strategies for survival.

"Until now, the attitude has been, 'If the North Koreans want to stew in their own juices, let them,' " Mr. Pollack said. "But it's becoming clear that Mr. Bush may leave office with the North Korean problem much worse."

Dealing with North Korea has frustrated every president since Truman. But it has proved particularly vexing for Mr. Bush because his administration has engaged in a six-year internal argument about whether to negotiate with the country or try to plot its collapse — it has sought to do both, simultaneously — and because America's partners in dealing with North Korea each have differing interests in North Korea's future.

On Wednesday, rejecting pressure from the Bush administration, China and Russia said they would not get behind an American drive to bring sanctions against North Korea, saying they favored less punitive actions.

It was the latest disappointment in a string of attempts to enlist China to help moderate the North. Still, answering questions on Wednesday, Mr. Bush expressed no interest in dropping his objections to one-on-one talks with the North, a government he once said he "detests."

Another alternative for Mr. Bush would be take a hard line that might risk an escalation of the half-century-old confrontation between the United States and North Korea. But such a tack is now complicated by the widespread assumption that even if the North does not have the ability to launch a nuclear weapon, it now probably possesses enough extra nuclear fuel that it may be tempted to sell some to a terrorist group or another state.

That is Mr. Bush's biggest concern, and late last year the National Security Council ordered a study of the likelihood that Mr. Kim, in his effort to seek attention or gain negotiating leverage, would threaten to do it. The results, according to a senior administration official who would not speak for attribution about intelligence matters, were inconclusive.

But so far the North has only dared to offer reminders, like the test firings while Americans were celebrating the Fourth of July, that it possesses weapons that could destroy Seoul or threaten Japan, including American forces based there. The launchings were only the second time that North Korea had tested an intercontinental-range missile that, depending on whose numbers one believes, could eventually hit the United States. (The last such test launching was in 1998, and as Anthony H. Cordesman of the Center for Strategic and International Studies put it Wednesday, "both failed dismally.")

To many experts, the missile tests fit into a pattern: whenever Mr. Kim has concluded that he was not getting attention to his demands, he has staged a crisis. His father, Kim Il Sung, did so in 1994, and won an agreement from the Clinton administration that later fell apart. Kim Jong Il did so in 2003, as American troops were flowing toward Iraq, when North Korea threw out international inspectors and reprocessed the 8,000 spent nuclear fuel rods into what the Central Intelligence Agency says is enough bomb-grade material for six or more weapons.

At that time, top Pentagon officials briefed Mr. Bush on his military options, including bombing the North's nuclear facilities. "It didn't take very long," one official deeply involved in that briefing said, "because it was pretty clear there wasn't an acceptable military option — or at least, a risk anyone was willing to take."

But Mr. Bush came to office appearing to have already determined that he would not negotiate, either. He often said that he distrusted North Korea's government and detested how Mr. Kim treated the North Korea people. In the first months of his presidency, he refused to endorse South Korea's "sunshine policy" of luring North Korea out of its shell with economic incentives. Yet the isolation strategy ultimately failed: North Korea kept producing plutonium.

Mr. Bush then reversed course, reluctantly agreeing to engage with the North Koreans at a distance, through six-nation talks convened by China and joined by Japan, South Korea and Russia. An agreement in principle was reached in September, calling for disarmament for security guarantees and eventual aid, but with no timetable. Even before the ink was dry, the North Koreans were interpreting it differently than the other signatories were.

Mr. Bush has most recently bet that China would eventually tire of the North Korean antics and enforce some discipline. Mr. Bush repeated that he and Jiang Zemin, China's former leader, had agreed that a nuclear North Korea was "unacceptable." But the reality, administration officials acknowledge, is that China fears a collapsed and chaotic North Korea more than it fears a nuclear-armed North Korea.

That could change now. The Chinese warned the North Koreans not to fire the missiles; the fact that Mr. Kim dismissed that warning is bound to anger China's leaders.

But so far, Mr. Bush has not been able to harness his partners into coordinated pressure on the North. If that changes soon, at the United Nations Security Council and around the world, it could be that the president will finally have a way forward.

North Korea Vows to Continue Missile Tests