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oseph, who in 2005 was listed by Forbes as the 283rd richest person in the U.S. and is still worth more than a billion dollars, has a long history of attempting to subvert consumer protection laws, giving state lawmakers millions of dollars to do his bidding. Year after year, Joseph has sponsored legislation to free his company from laws regulating the handling of accident claims, sales practices and control over the rates Mercury can charge.

A proposal similar to Joseph’s initiative was passed by the state legislature and signed into law by then Governor Gray Davis in 2004 after Mercury showered lawmakers and Davis with more than a million dollars in contributions; Consumer Watchdog and other groups went to the courts, which in 2005 invalidated the legislation as an unconstitutional amendment to voter-passed Proposition 103. In 2004, George Joseph’s investment fund was the target of an FBI subpoena in connection with an investigation into political corruption in Sacramento

One of the most critical Cheney-led briefings came in late October 2005, when the vice president and Porter J. Goss, then director of the CIA, read Sen. John McCain (R-Ariz.) into the program on the interrogation methods, according to congressional and intelligence sources.

One knowledgeable official described the meeting as contentious. Cheney and Goss, with other CIA officials present, tried to persuade the former Vietnam POW to back off an anti-torture amendment that had already won the support of 90 senators.

The McCain amendment would have ended practices such as waterboarding by forbidding "cruel, degrading and inhumane" treatment of detainees. The CIA had not used waterboarding since 2003, but the White House sought to maintain the ability to employ it.

In the meetings with lawmakers, Cheney was adamant that the enhanced interrogations were needed to preserve national security, according to two participants. He advocated briefing more lawmakers about the program, against the wishes of National Security Council officials who sought to inform only the top members of the intelligence committees.

Lawmakers at times challenged Cheney and CIA officials about the legality of the program and pressed for specific results that would show whether the techniques worked. In response, the CIA briefers said that half of the agency's knowledge about al-Qaeda's plans and structure had been obtained through the interrogations.

Cheney's briefings on interrogations began in the winter of 2005 as the top Democrats on the Senate and House intelligence committees, Sen. John D. Rockefeller III (W.Va.) and Rep. Jane Harman (Calif.), publicly advocated a full-scale investigation of the tactics used against top al-Qaeda suspects.

On March 8, 2005 -- two days after a detailed report in the New York Times about interrogations -- Cheney gathered Rockefeller, Harman and the chairmen of the intelligence panels, Sen. Pat Roberts (R-Kan.) and Rep. Peter Hoekstra (R-Mich.), according to current and former intelligence officials. Weeks earlier, Roberts had given public statements suggesting possible support for the investigation sought by Rockefeller. But by early March 2005, Roberts announced that he opposed a separate probe, and the matter soon died.

Cheney's efforts to sway Congress toward supporting waterboarding went beyond secret meetings in Washington. In July 2005, he sent David S. Addington, his chief counsel at the time, to travel with five senators -- four of them opponents of the CIA interrogation methods -- to Guantanamo Bay, Cuba. On the trip, Sen. Graham urged Addington to put the interrogations at secret prisons and the use of military tribunals into a stronger constitutional position by pushing legislation through Congress, rather than relying on executive orders and secret rulings from Justice Department lawyers.

Subsequent court rulings would challenge the legality of the system, and Justice Department lawyers were privately drafting new rules on interrogations. Addington dismissed the views of Graham, who had been a military lawyer.

"I've got all the authority I need right here," Addington said, pulling from his coat a pocket-size copy of the Constitution, according to the senator, suggesting there was no doubt about the system's legal footing.

More than 20 states enacted legislation in recent years to allow some form of private-sector investment that would help fill budget gaps and repair crumbling roads, bridges and even airports.

But now the deals are falling apart. In April, a much-anticipated $2.5 billion plan to privatize Midway Airport in Chicago collapsed after a group of investors was unable to obtain debt financing. The deal, which had been in the works for four years, was to have been the first in a Federal Aviation Administration project that would have allowed up to five major airports to move into private hands.

Midway was just the latest setback. The biggest was the failure last fall of the largest deal proposed to date — a $12.8 billion lease of the Pennsylvania Turnpike to an investor group headed by Citigroup and a Spanish investment firm. Postmortems into that failed effort show that privatization advocates vastly underestimated the political opposition the deal would stir up in the Pennsylvania legislature.

Late last month plans to privatize “Alligator Alley,” a 78-mile stretch of Florida highway that connects Fort Lauderdale with Naples, collapsed when no bidders showed up. The failure has had a ripple effect — in Mississippi, state officials have pushed back the bidding schedule for a new 12-mile toll road.

Then there is the $1.2 billion privatization of 36,000 parking meters in Chicago. In the five months since the deal took effect, widespread complaints about poor service and rising parking rates have created a political firestorm for the Chicago City Council. Public opposition was so strong that on Wednesday the council approved a delay in voting on any future asset sales.

Chicago public officials have called the work of the private operator, Chicago Parking Meters L.L.C., “simply unacceptable.” For its part, the operator has apologized and announced it would delay price increases at the meters.

If the market revives, the problems that scuttled recent deals may provide some lessons. In the case of the Pennsylvania Turnpike, politics clearly played a role in the deal’s collapse. A study by the Pew Center on the States found that proponents of the deal had overpromised what the turnpike could fetch and had failed to make it clear where the money would go.

After indicating that the turnpike might be valued at as much as $26 billion, when the winning $12.8 billion bid came in lawmakers felt it looked too small. Even more, there was concern that the money would be squandered and that the state was putting a valuable asset into foreign hands, since the top bidder included a Spanish company.

“It simply wasn’t a sufficient bid by a long shot,” said Joseph F. Markosek, a state legislator and head of the Pennsylvania House Transportation Committee.

Similar sentiments are coming into play in Florida, where few had expected Alligator Alley to be leased. “I believe the private partnership is like fool’s gold,” said David Aronberg, a state senator in south Florida who has led the fight against privatization. “It only looks good from afar.”

Mr. Askari said the release of the British hostages had been part of the negotiations.

“This is a very sensitive topic because you know the position that the Iraqi government, the U.S. and British governments, and all the governments do not accept the idea of exchanging hostages for prisoners,” he said. “So we put it in another format, and we told them that if they want to participate in the political process they cannot do so while they are holding hostages. And we mentioned to the American side that they cannot join in the political process and release their hostages while their leaders are behind bars or imprisoned.”

The Khazali brothers were captured by the Americans in Basra on March 20, 2007. Qais al-Khazali was accused of being one of the two masterminds of the Karbala killings of the five American soldiers two months earlier.

Along with the brothers, the Americans seized a 22-page document they had on the Karbala attack, said Gen. Kevin J. Bergner, an American military spokesman, in a briefing on July 3, 2007. That document, he said, showed that the Quds Force had gathered detailed information on the activities of American soldiers in Karbala , including shift changes and the defenses at the site where they were seized.

According to General Bergner, in the course of interrogation, Qais al-Khazali said that “senior leadership within the Quds Force knew of and supported planning for the eventual Karbala attack that killed five coalition soldiers.”

On May 29, 2007, about two months after the Americans’ capture of the Khazali brothers, the five British citizens were kidnapped. The attack at the Finance Ministry, like the Karbala attack, was meticulously planned, using men wearing Iraqi police uniforms.

Having reissued his book The Return of Depression Economics, he clearly has an interest in representing the current crisis as a repeat of the 1930s. But it is not. US real GDP is forecast by the International Monetary Fund to fall by 2.8 per cent this year and to stagnate next year. This is a far cry from the early 1930s, when real output collapsed by 30 per cent. So far this is a big recession, comparable in scale with 1973-1975. Nor has globalisation collapsed the way it did in the 1930s.

Credit for averting a second Great Depression should principally go to Fed chairman Ben Bernanke, whose knowledge of the early 1930s banking crisis is second to none, and whose double dose of near-zero short-term rates and quantitative easing – a doubling of the Fed’s balance sheet since September – has averted a pandemic of bank failures. No doubt, too, the $787bn stimulus package is also boosting US GDP this quarter.

But the stimulus package only accounts for a part of the massive deficit the US federal government is projected to run this year. Borrowing is forecast to be $1,840bn – equivalent to around half of all federal outlays and 13 per cent of GDP. A deficit this size has not been seen in the US since the second world war. A further $10,000bn will need to be borrowed in the decade ahead, according to the Congressional Budget Office. Even if the White House’s over-optimistic growth forecasts are correct, that will still take the gross federal debt above 100 per cent of GDP by 2017. And this ignores the vast off-balance-sheet liabilities of the Medicare and Social Security systems.

It is hardly surprising, then, that the bond market is quailing. For only on Planet Econ-101 (the standard macroeconomics course drummed into every US undergraduate) could such a tidal wave of debt issuance exert “no upward pressure on interest rates”.

Of course, Mr Krugman knew what I meant. “The only thing that might drive up interest rates,” he acknowledged during our debate, “is that people may grow dubious about the financial solvency of governments.” Might? May? The fact is that people – not least the Chinese government – are already distinctly dubious. They understand that US fiscal policy implies big purchases of government bonds by the Fed this year, since neither foreign nor private domestic purchases will suffice to fund the deficit. This policy is known as printing money and it is what many governments tried in the 1970s, with inflationary consequences you do not need to be a historian to recall.

No doubt there are powerful deflationary headwinds blowing in the other direction today. There is surplus capacity in world manufacturing. But the price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank’s latest quarterly report: “A policy mistake ... may bring inflation risks to the whole world.”

The policy mistake has already been made – to adopt the fiscal policy of a world war to fight a recession. In the absence of credible commitments to end the chronic US structural deficit, there will be further upward pressure on interest rates, despite the glut of global savings. It was Keynes who noted that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”. Today the long-dead economist is Keynes, and it is professors of economics, not practical men, who are in thrall to his ideas.

increased transparency of derivatives trades would cut into banks’ profits — hence the banks’ opposition. Customers who trade derivatives would pay less if they knew what the prevailing market prices were.

“The banks want to go back to business as usual — and then some. And they have a lot of audacity now that everyone has bailed them out,” said Yra Harris, an independent commodities trader who was involved in an effort to regulate derivatives nine years ago. “But we have to begin with the premise that Wall Street doesn’t want transparency, because more transparency means less immediate profits.”

What makes this fight different, say Wall Street critics and legislative leaders, is that financiers are aggressively seeking to fend off regulation of the very products and practices that directly contributed to the worst economic crisis since the Great Depression. In contrast, after the savings-and-loan debacle of the 1980s, the clout of the financial lobby diminished significantly.

The current battle mirrors a tug-of-war a decade ago. Arguing that regulation would hamper financial innovation and send American jobs overseas, Congress passed legislation in December 2000 exempting derivatives from most oversight. It was signed by President Bill Clinton.

After the 2000 legislation was passed, derivatives trading exploded, helping the biggest traders earn immense profits.

The market now represents transactions with a face value of $600 trillion, up from $88 trillion a decade ago. JPMorgan, the largest dealer of over-the-counter derivatives, earned $5 billion trading them in 2008, according to Reuters, making them one of its most profitable businesses.

Among the companies that expanded rapidly was A.I.G. Straying from its main business of providing property and life insurance, A.I.G. wrote a type of contract known as credit-default swaps that protected holders of mortgage securities against defaults. When millions of subprime borrowers stopped paying their mortgages, A.I.G. had to provide cash collateral that it did not have to clients that had bought its insurance.

Before the crisis, few market participants knew the size of A.I.G.’s exposure. Some derivatives transactions occur on exchanges, where the value and nature of the contracts are disclosed, but many do not. Credit-default swaps trade privately. This kept risk in these trades under wraps, leaving regulators unaware of how dangerously stretched and poorly managed the market was.

A major New York clearinghouse is ICE U.S. Trust, an entity closely affiliated with banks that are also members of Mr. Rosen’s group, the CDS Consortium.

Although the Chicago Mercantile Exchange is a more established place for derivatives trading and is independent from the big New York banks, ICE seems to be the clearinghouse of choice, especially among policy makers in Washington, said Brad Hintz, a brokerage firm analyst at Bernstein Research. That is because under the Treasury proposal, the Federal Reserve Bank of New York would oversee ICE, while the Commodity Futures Trading Commission would oversee the Chicago Mercantile Exchange. Critics say the Fed has been too easy on those it oversees.

Theo Lubke, a senior New York Fed official, countered Mr. Hintz’s view, saying the Fed wants a market where a variety of clearinghouses can succeed.

Analysts say that because major banks that deal derivatives are so closely affiliated with ICE, they could seek to have many of the products classified as “customized” — the only category that would keep them off regulators’ radar screens under Mr. Geithner’s proposal.

Letting “customized” derivatives — like many credit-default swaps — trade without detailed disclosure is a way to keep regulators in the dark, he said.

Mr. Harkin said Mr. Geithner visited the Democratic caucus on Capitol Hill three weeks ago. At that meeting, Mr. Harkin said, he challenged Mr. Geithner to “define customized swaps.” Mr. Harkin said the Treasury secretary told him he would have to get back to him.

Through political action committees and their own employees, securities and investment firms gave $152 million in political contributions from 2007 to 2008, according to the most recent Federal Election Commission data.

The top five companies — Goldman Sachs, Citigroup, JP Morgan Chase, Bank of America and Credit Suisse — gave $22.7 million and spent more than $25 million combined on lobbying activities in that period, according to election data compiled by the Center for Responsive Politics.

All five companies are members of the CDS Dealers Consortium, the lobbying group formed in November. Lobbying records show that the group has paid Mr. Rosen, the Cleary Gottlieb partner, $430,000 for four months’ work. Mr. Rosen declined to comment, a spokeswoman said, citing “client sensitivities.”

Mr. Rosen, co-author of a treatise on derivatives regulation, frequently counsels the industry on these complex contracts. In late January, according to e-mail messages, he asked the members of the CDS dealer group if they would support his testifying before Congress on behalf of the Securities Industry and Financial Markets Association, a trade group. The CDS dealers are a much smaller group with a far larger interest in derivatives than Sifma as a whole.

Mr. Rosen received an e-mail response from Mary Whalen, managing director for public policy at Credit Suisse, the Swiss bank, which is active in the derivatives market:. “It is a good idea for Ed to write the testimony and if necessary testify. That way we can be sure that the banks’ point of view is expressed, rather than taking a chance on testimony that Sifma might craft.”

Sifma’s members include 650 firms of varying size and interests, many of which do not trade complex derivatives. By taking the lead, Mr. Rosen was able to position himself as the main advocate on derivatives for the securities industry and to make sure that the group of nine banks in the CDS Dealers Consortium had a loud voice within Sifma.

At a House Agriculture Committee hearing on derivatives in February, Mr. Rosen testified on behalf of Sifma. He did not mention that he was also a paid lobbyist for the CDS Dealers Consortium, whose interests might be different from Sifma’s.

Those testifying at such hearings are not required to disclose all of their affiliations. But when asked, Representative Collin C. Peterson, a Minnesota Democrat and the chairman of the House Agriculture Committee, said he had not known of Mr. Rosen’s relationship to the consortium. He said he would have liked to have known because it would have guided his questioning and interpretation of Mr. Rosen’s testimony, given that his clients in the smaller CDS group represented a narrower interest group with a more specific agenda.

Mr. Peterson’s bill specifically bars derivatives trading in a clearinghouse regulated by the New York Federal Reserve, which he said in an interview “is a tool of the big banks” that “wouldn’t do much” to regulate the contracts.

Because the banks’ lobbyists persuaded some of his Republican colleagues to resist more sweeping changes, Mr. Peterson said, he has had to modify a bill he introduced that is similar to Mr. Harkin’s in calling for wide-ranging limits on derivatives.

“The banks run the place,” Mr. Peterson said. “I will tell you what the problem is — they give three times more money than the next biggest group. It’s huge the amount of money they put into politics.”