Syria says army still undecided on ceasefire move

BEIRUT/CAIRO (Reuters) - Syria said on Wednesday its military command was still studying a proposal for a holiday ceasefire with rebels - contradicting international mediator Lakhdar Brahimi's earlier announcement that Damascus had agreed to a truce.

The statement threw Brahimi's efforts to arrange a pause in the bloodshed in Syria into even more confusion, as the rebels fighting to topple President Bashar al-Assad have given no indication they would be willing to sign up to it.

A previous ceasefire arrangement in April collapsed within days, with both sides accusing the other of breaking it.

Brahimi, the joint U.N.-Arab League special envoy, had crisscrossed the Middle East to push the warring factions and their international backers to agree to a truce over the Muslim holiday of Eid al-Adha - a mission that included talks with Assad in Damascus at the weekend.

"After the visit I made to Damascus, there is agreement from the Syrian government for a ceasefire during the Eid," Brahimi told a news conference at the Arab League in Cairo.

Within an hour, Syria's Foreign Ministry said the proposal was still being studied by the armed forces' leadership. "The final position on this issue will be announced tomorrow," a ministry statement said.

The holiday starts on Thursday and lasts three or four days. Brahimi did not specify the precise time period for a truce.

Nor did the initiative include plans for international observers and rebel sources had earlier told Reuters there was little point if it could not be monitored or enforced.

The two sides are now locked in a battle with huge potential ramifications in the northwest.

Syrian warplanes carried out bombing raids on Wednesday on the strategic northern town of Maarat al-Numan and nearby villages while rebels surrounded an army base to its east, an activist monitor said.

Five people from one family, including a child and a woman, were killed in the air strikes, according to Rami Abdelrahman, head of the British-based Syrian Observatory for Human Rights.

Maarat al-Numan has fallen to the rebels, effectively cutting the main north-south highway, a strategic route for Assad to move troops from the capital Damascus to Aleppo, Syria's largest city where the insurgents have taken a foothold.

But without control of the nearby Wadi al-Daif military base, their grip over the road is tenuous. Its capture would be a significant step towards creating a "safe zone" allowing them to focus forces on Assad's strongholds in southern Syria.

The rebels say the ferocity of counter-attacks by government forces shows how important holding the base is to Assad's military strategy.

Opposition activist footage on Wednesday showed a column of grey smoke rising after a bomb hit the village of Deir al-Sharqi, a few kilometres (miles) south of the base.

REFUGEES FLEE BOMBARDMENTS

Meanwhile, hundreds of Syrian refugees have poured into a makeshift refugee camp at Atimah overlooking the Turkish border, fleeing a week of what they said were the most intense army bombardments since the uprising began.

"Some of the bombs were so big they sucked in the air and everything crashes down, even four-storey buildings. We used to have one or two rockets a day, now for the past 10 days it has become constant, we run from one shelter to another. They drop a few bombs and it's like a massacre," one refugee, a 20-year-old named Nabil, told Reuters at the camp.

The army has lost swathes of territory in recent months and relies on air power and heavy artillery to push back the rebels fighting to topple Assad.

More than 32,000 people have been killed in the conflict, which began with peaceful pro-democracy protests in March 2011 before descending into civil war as repression increased.

Human Rights Watch said the Syrian air force had increased its use of cluster bombs across the country in the past two weeks. The New York-based organisation identified, through activist video footage of unexploded bomblets, three types of cluster bombs which had fallen on and around Maarat al-Numan.

Cluster bombs explode in the air, scattering dozens of smaller bomblets over an area the size of a sports field. Most nations have banned their use under a convention that became international law in 2010, but which Syria has not signed.

Russia said on Wednesday the rebels had acquired portable surface-to-air missiles including U.S.-made Stingers - a weapon that would help bring down warplanes and helicopters which have bombed residential areas where rebels are hiding.

Opposition activist footage has shown rebels carrying Soviet-made surface-to-air missiles, but footage of Stingers has yet to appear.

In contrast to the Libya crisis last year, the West has shown little appetite to arm the Syrian rebels, worried that weapons would fall into the hands of Islamic militants.

Russia, which has supported Assad through the conflict, sold his government $1 billion worth of weapons last year and has made clear it would oppose an arms embargo in the U.N. Security Council.

A total of 190 people were killed across Syria on Tuesday, the Observatory said.

(Reporting by Marwan Makdesi in Damascus, Oliver Holmes in Beirut, Erika Solomon in Atiha, Yasmine Saleh and Tom Perry in Cairo, and Steve Gutterman in Moscow; Writing by Angus MacSwan; Editing by Mark Heinrich)

Arabs grudgingly favor Obama in U.S. election

CAIRO (Reuters) - Many in the Middle East believe Barack Obama failed to deliver on promises of a new U.S. approach in the region but still prefer him to presidential rival Mitt Romney, who they see as too close to Israel and too keen to project U.S. military might.

Whoever wins the November 6 election faces a knot of regional issues that will not be easy to unravel. World powers are split over the Syria conflict, a row about Iran's nuclear ambitions rumbles on and Palestinian-Israeli peacemaking is going nowhere.

Compounding the challenge, the Middle East is a region where perceptions of fading U.S. influence have been hardened by Arab uprisings that have toppled dictators who were longtime U.S. allies, bringing Islamists in their place.

"I am one of those who is very much disappointed with Obama," said Hassan Nafaa, a professor at Cairo University, where the U.S. president, in his first months in office, spoke of "a new beginning" between America and Muslims.

"He didn't deliver ... But I think he is much better than Romney," said Nafaa, who listened to the Cairo speech in June 2009. "I don't appreciate at all the right wing in the United States with their preference to use extensive military force."

Much of the Middle East has changed dramatically during Obama's first term. But the upheavals of the "Arab Spring" that ousted entrenched autocrats in Tunisia, Egypt, Yemen and Libya were driven by the street rather than U.S. policy, even if U.S. and European warplanes assisted Libyan rebels.

Far from winning praise, some Egyptian activists criticized Obama's administration for being slow to embrace the change.

"Obama was easy on Mubarak at points and the American administration did not play a full role in supporting the Egyptian revolution," said Mohamed Adel, a spokesman for the April 6 movement that was at the forefront of the 2011 uprising that toppled Hosni Mubarak after 30 years in power.

But he said Romney was not an attractive alternative for Egypt or the region, describing him as more "aggressive" and citing the Republican's threats to U.S. aid to Egypt during September protests at the U.S. embassy over an anti-Islam film.

DRAWING COMPARISONS

Romney has accused Obama of being a weak steward of U.S. power, promising among other things to boost the U.S. naval presence in the Middle East. He has also said he would be a better friend of Israel, a nation Obama has not visited in office.

That kind of language rings alarm bells in the region and has drawn comparisons with the policies of President George W. Bush, reviled by many Arabs for leading an invasion of Iraq.

As Arabs watched the last of three televised presidential debates on Monday night, one viewer, Ahmed Zaki, wrote about Romney on Twitter saying: "He doesn't differ much from Bush."

But both candidates disappointed veteran Palestinian negotiator Hanan Ashrawi during the face-off on foreign policy in which Israel was referred to more than 30 times and the Palestinians were given only passing mention.

"What we didn't see in the debate was any sign of who has the backbone and foresight to bring about a just peace," said Ashrawi, adding that the candidates were competing on "who's more loyal to Israel".

Romney angered Palestinians earlier this year by suggesting they lacked the culture that has driven Israel's economic success, while ignoring problems generated by Israeli occupation of territories where they Palestinians seek statehood.

He also called Jerusalem Israel's capital. The Jewish state regards all of Jerusalem, including the eastern sector that it captured in a 1967 Middle East war, as its capital, a claim that has not won international recognition. Palestinians want East Jerusalem as the capital of a future state.

Yet there is little enthusiasm in the region for Obama, who in his Cairo address had pledged support for a Palestinian state that now looks as much a distant prospect as at any time.

For some, like 45-year-old Iraqi shop worker Firas al-Qaisi, neither candidate will make a real difference.

"Look at the Palestinian issue, there is no change in the American policy since 1948 although many presidents came and went," he said in Baghdad.

Yet Iraq is one place where Obama has had an impact by withdrawing U.S. troops, although Romney has accused the president of being too hasty.

LITTLE CHOICE

That achievement was acknowledged by Alaa al-Saadoun, an Iraqi Kurdish lawmaker. "The work Obama did withdrawing American forces from Iraq made a difference. If the Republicans were in power, they would not have left," he said.

But even as that military intervention was ended, Obama has ordered U.S. drones to kill militants in Yemen and Pakistan, enraging many in the region. Romney has backed this action.

Such policy convergence makes some Iranians, whose economy is being crippled by U.S. and other international sanctions imposed over Tehran's disputed nuclear program, feel there is little to choose between either candidate.

"Obama has already showed he wants to wreck the Iranian economy, bring hard times and prevent important medicine by sanctioning the central bank so there is not a lot Romney could do that Obama hasn't done already," said Mohammad Marandi of Tehran University, speaking by telephone from Tehran.

A commentary published by the Iranian news agency Fars echoed that view: "Will it be more of the fist inside the velvet glove, or the hammer directly to the skull?"

As sanctions tighten on Iran, the conflict in Iran's ally Syria has deepened with the United States and its Western allies at odds with Russia and China about what action to take, though no world power has been advocating direct military intervention.

Romney said earlier this month he would find elements in Syria who shared U.S. values and make sure they obtained weapons needed to defeat Syrian President Bashar al-Assad. Obama's administration says it is giving logistical support to Syrian insurgents but has shied away from providing arms.

The international gridlock over Syria and uprisings that have breathed new vigor into Arab politics may also be changing attitudes about the United States, for years seen as the only player with the clout to make a difference in the region.

"There is sense that the U.S. isn't as relevant as it once was," said Shadi Hamid of the Brookings Doha Center. "But that is also partly because the Arab Spring helped empower Arabs to move away from their obsessive focus on the U.S."

His remarks were echoed by 70-year-old Egyptian security guard, Gamal: "I don't expect any change from the Americans towards us. We have to change ourselves with our own hands."

(Additional reporting by Tamim Elyan, Tom Pfeiffer and Yasmine Saleh in Cairo, Regan Doherty in Qatar, Marcus George in Dubai, Noah Browning and Crispian Balmer in Jerusalem, and Patrick Markey, Raheem Salman and Aseel Kami in Baghdad; Editing by Mark Heinrich)

VW net profit up 58 percent on accounting gain

FRANKFURT, Germany (AP) — German automaker Volkswagen AG saw net profit rise 58 percent in the third quarter because of an accounting boost from its takeover of Porsche, but other profit measures fell and the company said it was facing an uncertain economic environment.

The company held on to its full year forecast for earnings equal to last year's, and said the full integration of Porsche and the company's presence in all major regions of the world meant it was in good shape.

Nonetheless, the numbers at the opening of earnings season for German carmakers suggested that they could no longer completely escape the downdraft from the eurozone debt crisis that has walloped consumers in Greece, Spain, Portugal and Italy.

Volkswagen, Daimler, and BMW have reaped fat earnings from strong export sales of more profitable luxury vehicles to the U.S. and China. But analysts say pricing and margins — the amount earned on each car — are under pressure at home in Europe and in the Chinese market, even though the economy there may be growing.

Volkswagen group net profit rose to €11.38 billion ($14.8 billion) from €7.14 billion in the same quarter last year, strongly boosted by gains from the complex deal that made Porsche one of VW's 12 brands. Global sales rose 27 percent to €48.84 billion.

Analysts at Sanford C. Bernstein have said the non-cash gain from the complex Porsche deal would be around €7 billion in the quarter, citing guidance from company officials. It involves re-valuing options and how the Porsche stake is accounted for on Volkswagen's books.

Operating earnings — excluding financial items such as interest and taxes, as well as the effects of the merger — fell 19 percent to €2.34 billion from €2.89 billion.

Operating earnings give an incomplete view of a company's finances, but are often used by analysts and investors to get a better focus on how the company's core activity is developing. The operating earnings figure was in line with the consensus estimate of €2.35 billion among analysts surveyed by financial information provider FactSet.

Volkswagen had strong sales in the U.S., its home market of Germany and in China, where sales rose 21 percent. It saw tougher markets however in southern Europe due to the eurozone debt crisis, particularly at its Spanish SEAT subsidiary. Spain has an unemployment rate of 25 percent.

CEO Martin Winterkorn said the company remains "committed to our ambitious goals for 2012, despite growing headwinds."

He said the company was well positioned due to its young model lineup, its global presence, and to the addition of Porsche, whose results were added to the company's earnings for the first time. The company confirmed its forecast that this year's operating earnings will equal those last year, and that sales will exceed last year's.

Microsoft formal antitrust complaint

EU sends "Microsoft formal antitrust complaint

BRUSSELS (AP) -- The European Union's executive arm formally accused Microsoft on Wednesday of failing to comply with a binding agreement to give customers a choice among Internet browsers.

In 2009, the European Commission said it suspected Microsoft of using its dominant market position to foist its Internet Explorer browser on users. In negotiations, Microsoft agreed to create a screen where users could choose among competitors' browsers. The Commission accepted that concession and made the creation of a "browser choice screen" legally binding.

But in July, the Commission said the screen had not been displayed on many computers between February 2009 and July 2012, and millions of users may have been affected during that period. At the time, Microsoft said that a technical error was responsible.

EU Competition Commissioner Joaquin Almunia said any breach would be a "serious infringement," noting that the settlement between the EU and Microsoft had allowed the company to avoid lengthy antitrust proceedings and being held liable.

"Companies should be deterred from any temptation to renege on their promises or even to neglect their duties," he said.

On Wednesday, the company apologized for the error and said it was working to make sure it didn't happen again,

"We take this matter very seriously and moved quickly to address this problem as soon as we became aware of it," Microsoft said in a statement. "Although this was the result of a technical error, we take responsibility for what happened."

Microsoft will now be given four weeks to respond to the formal complaint and can seek an oral hearing. Once it has assessed Microsoft's defense, the Commission will rule.

The company could face a fine of up to 10 percent of its annual revenue if found in breach of antitrust law.

Plenty of Debates, Not Much About States

In the presidential debates, Barack Obama and Mitt Romney ranged across dozens of topics, but an important one didn't come up: federalism. And no wonder.

The idea that the Constitution grants only limited and enumerated powers and leaves the remainder to the states is foreign to those who believe that the national government should or even could address voters' every concern. But contrary to the view widely shared by the political class, Washington—in particular, Congress—does not have the power to pass any law it wants in the name of the "general welfare."

Politicians should take heed. Voters are increasingly focused on the proper role of government in society: Witness the rise of the tea party and unease over the massive debt caused by entitlements and other government handouts. The continuing loud objection to ObamaCare's takeover of health care shows that voters want to preserve the Constitution's architecture of limited federal power.

Keeping the federal government within its proper constitutional sphere is critical to all Americans, regardless of their political allegiance. This is because federalism is not about protecting "states' rights" but about preserving individual liberty. In the words of a unanimous 2011 Supreme Court decision, Bond v. United States, by "denying any one government complete jurisdiction over all the concerns of public life, federalism protects the liberty of the individual from arbitrary power. When government acts in excess of its lawful powers, that liberty is at stake."

Federalism also allows states to craft policies that best suit the preferences and needs of their citizens, who can always vote with their feet. Likewise, leaving key policy choices to state governments benefits voters through sheer proximity to decision makers. State legislators are often part-timers who work and live in our communities and are more palpably accountable to us.

State-level reform thus comes more swiftly and better reflects the desires of ordinary constituents. States in recent years have led the way in reforming welfare, health care, education and regulatory policies. They have cut deficits, balanced budgets, reformed tax codes and produced jobs.

Federalism also benefits the national government. By having up to 50 different approaches to an issue, Congress can see what works.

Despite federalism's many virtues, it is not much in vogue. Democrats view it as a quaint, 18th-century relic, another disposable constitutional concept that stands in the way of "progress." The Obama administration has been particularly disdainful of federalism, with ObamaCare unconstitutionally coercing states into fundamentally revising their Medicaid programs and compelling individuals—under the guise of regulating interstate commerce—to buy a government-approved health-insurance policy.

Republicans pay lip service to federalism but too often toss it aside to achieve their own policy goals. For example, many congressional Republicans, concerned about abusive lawsuits, would nationalize many aspects of medical malpractice, an area of law traditionally reserved to the states.

Meanwhile big-spending states such as California and Illinois have been lobbying Congress for a federal bailout of their unfunded pensions. From the federalist perspective, it is appropriate that the promiscuous spending of some states makes it difficult for them to borrow more money. Such consequences, while dire, provide the political leverage that citizens living within those states need to force their elected representatives to reform.

Yet Washington may well end up rescuing these nearly bankrupt states—because some states will compromise their own sovereignty when the price is right, and the federal government is only too happy to take over and claim political credit. For there is no more assiduous underminer of federalism than the federal government itself. Every session of Congress and every administration adds to the existing voluminous body of federal law that continues to federalize wide swaths of traditional state authority. This must stop.

There was one glimmer of hope for federalism in the third presidential debate, when Mitt Romney talked about saving Medicaid by making block grants to states. "We'll take that health-care program for the poor and we give it to the states to run because states run these programs more efficiently," he said. "As a governor, I thought please, give me this program. I can run this more efficiently than the federal government and states, by the way, are proving it."

If Mr. Romney succeeds in his race for the White House, let's hope he doesn't forget that states can be trusted to run their own affairs.

Mr. Rivkin served in the Justice Department under Presidents Reagan and George H.W. Bush and represented 26 states in challenging ObamaCare. He has advised the Romney campaign.

Ms. Foley is a law professor at Florida International University College of Law and author of "The Tea Party: Three Principles" (Cambridge, 2011).

Eurozone debt hits 90 percent of its economy

LONDON (AP) — In spite of years of harsh spending cuts and tax increases, Europe's debt problems are getting worse.

Official figures showed Wednesday that the total debt of the 17 countries that use the single currency at the end of the second quarter was worth 90 percent of the value of the group's economy — the highest level since the euro was launched in 1999.

The rise from the previous quarter's 88.2 percent and the previous year's equivalent of 87.1 percent, as reported by Eurostat, the EU's statistics office, is a result of the eurozone's economic problems — which are making it harder for countries to handle their debts.

"The euro area economy remains stuck in a rut," said James Ashley, senior European economist at RBC Capital Markets.

According to Eurostat five of the countries that use the euro are in recession — Greece, Spain, Italy, Portugal, and Cyprus. Many analysts expect the eurozone to slip back into recession in the third quarter of the year when official figures are published next month. A recession is technically defined as two quarters of negative growth in a row.

Other figures Wednesday pointed to a deepening economic crisis in the eurozone. The purchasing managers' index — a gauge of business activity — from financial information company Markit fell from the previous month's 46.1 to 45.8 in October — its lowest level in more than three years. Any figure below 50 indicates a contraction in activity.

Meanwhile, a closely watched survey from the Ifo Institute found business confidence in Germany, Europe's biggest economy, confounded expectations of a modest increase and dropped for the sixth month in a row. Ifo's key figure for October dropped to 100 from 101.4 in September.

Germany has been the main reason why the eurozone has not fallen into recession. The country's powerhouse exporters, such as Volkswagen and BMW, have taken a slice of rising trade volumes around the world while its consumers have shown an increasing appetite to spend. However, the country's economy has recently lost its momentum as the debt troubles on its doorstep have weighed on economic confidence.

A shrinking economy makes the value of a country's debt as a proportion of the size of its economy worse. Over the past year, Italy's debt burden, for example, has risen from 123.7 percent in the first quarter to 126.1 percent in the second quarter — that's come while its economy has shrunk for four straight quarters.

Greece's finances, though, are in a league of their own. The country, which is struggling to convince debt inspectors that it's fulfilling pledges it has made in return for billions of euros worth of bailout cash, saw the biggest quarterly increase in its debt burden to 150.3 percent of national income in the second quarter from 136.9 percent in the first.

The increase comes despite a dramatic fall in debt in the first quarter after Greece had successfully negotiated a deal with private bondholders to accept a writedown of their Greek holdings. The country's debt was reduced to €280 billion in the first quarter from €341 billion in the second quarter of 2011 as a result of the writedown.

But any advantage gained is slowly being whittled away by the country's deep recession, which appears headed for a sixth year. Interest on the debt, as well as continued budget deficits, pushed the debt back above €300 billion in the second quarter of 2012.

In the second quarter of 2012, the Greek economy was 6.2 percent smaller than the same period the previous year and all forecasters think the recession will last for a while longer, especially as the country readies to implement even more austerity measures. Lower wages, for example, will impact consumer spending, often a vital ingredient of economic growth.

Investors weigh upbeat China news, European gloom

LONDON (AP) — Financial markets steadied Wednesday as a report showing China's manufacturing slump may be bottoming out helped offset the impact of more dire European economic news.

In Europe, few signs emerged of any economic improvement.

Government debt in the 17-country eurozone rose to 90 percent of the bloc's economic output at the end of the second quarter, according to official data. That's the highest in the currency union's 13-year history and up from the previous quarter's 88.2 percent.

The increase was due to a drop in economic growth and bodes ill for governments trying hard to reduce debt by means of tough tax hikes and spending cuts.

Meanwhile, a key survey of business activity, the so-called Purchasing Managers' Index published by financial data company Markit, fell in October to its lowest level in over three years. A measure of German business confidence also fell.

"Surveys worryingly indicate that the eurozone downturn is, if anything, deepening rather than easing," said Howard Archer, chief European economist at IHS Global Insight.

Offsetting the pain for markets, however, was a survey showing manufacturing activity in China contracting at a much slower pace in October.

HSBC Corp.'s purchasing managers' index for manufacturing rose to 49.1 points — a three-month high — from 47.9 points in September on a 100-point scale on which numbers below 50 indicate a contraction.

By late morning in Europe, Britain's FTSE 100 and Germany's DAX were both flat, at 5,800 and 7,175 respectively. France's CAC-40 was up 0.3 percent to 3,415.

The auto sector was in focus on Wednesday after France's PSA Peugeot Citroen said the government was offering it a €7 billion ($9.1 billion) lifeline. In return, the Socialist government is expected to demand a reduction in layoffs as well as the suspension in dividend payments. Shares in Peugeot were down 4.3 percent.

Volkswagen AG saw its shares rise 3.1 percent after it reported a 58 percent increase in its third quarter net profit. The company has strong sales in the U.S. and China but saw tougher markets in southern Europe due to the eurozone debt crisis.

Wall Street appeared set for gains a day after suffering sharp losses. Dow Jones industrial futures rose 0.1 percent while S&P 500 futures added 0.2 percent.

On Tuesday, stocks suffered big losses after some grim U.S. corporate reports. Big-name companies like Xerox and 3M reported lower revenue for the third quarter, while chemical maker DuPont said it will have to cut jobs and other expenses to make up for weak demand. UPS, the world's largest package-delivery company, warned that the pace of global growth remains uneven.

Earlier, in Asia, stocks showed some initial resilience but then faded.

Japan's Nikkei 225, after swinging between gains and losses, fell 0.7 percent to close at 8,954.30. Hong Kong's Hang Seng added 0.3 percent to 21,763.78. South Korea's Kospi lost 0.7 percent to 1,913.96.

Mainland Chinese shares were mixed. The Shanghai Composite Index rose 0.1 percent to 2,115.99 but the smaller Shenzhen Composite Index fell 0.4 percent to 866.45. Indian markets were closed for a holiday.

Benchmark oil for December delivery was up 18 cents to $86.85 per barrel in electronic trading on the New York Mercantile Exchange.

In currencies, the euro fell to $1.2945 from $1.2976 late Tuesday in New York.

___

Pamela Sampson in Bangkok contributed to this re

Connelly-The Countdown to Fiscal

Connelly-The Countdown to Fiscal Cliff Has Started

By Terry Connelly, dean emeritus of the Ageno School of Business at Golden Gate University

Once the Presidential and Congressional elections are over, or even before, attention will focus anew on the "fiscal cliff" — the forced sequestration of both military and discretionary spending coupled with the expiration of all the Bush income and Obama payroll tax cuts.

Congress agreed to this "solution" to our chronic debt and deficit problem — with elements thought ultimately unacceptable to both political parties — when they could not reach any other consensus. The view was that the outcome would be so bad neither party could live with the consequences politically, and a real (and more realistic) compromise agreement would thus be forced.

What's Coming?

The predicted consequences of the fiscal cliff indeed are odious. The severity of the spending cuts coupled with across the board tax increases virtually guarantees a renewed recession in 2013; the military cuts would be a disaster in the words of the Secretary of Defense; the social "safety net" would be shredded; unemployment would rapidly increase as economic activity contracts — the monthly job creation figures would quickly go negative.

And yet — barely two months before all this comes to pass, nothing is being done to move an agreement forward in Congress, except some preliminary posturing. Republicans continue to resist any deal that would eliminate the Bush tax cuts for upper-income earners including the top 3% of small businesses. Many Republicans up for re-election have signed the "Norquist pledge" to reject any "tax increase," which would preclude any such compromise.

Meanwhile, the White House has let it be known that President Obama (presumably, whether or not he is re-elected) would veto any package replacing the fiscal cliff that did not eliminate the Bush tax cuts for families and small businesses that earned over $250,000). While the Vice President mentioned a million dollar cap in his debate with Congressman Ryan, that appears to have been a trial balloon rather than a mature offer-in-compromise.

It's About Taxes

While both parties have until recently been relatively quiet about the expiration of the "temporary" cut in employees' portion of the payroll tax, some democrats have put that "tax increase' back on the table (if only to potentially embarrass Tea Party stalwarts who would be voting for a "tax increase" as part of any deal to let that stimulus expire as planned.

There are multiple alternative ways to replace the automatic spending cuts with more palatable reductions in spending programs — many were already in print during the discussions of the futile "Grand Bargain" between Speaker Boehner and President Obama in 2010, as well in the considerations of the "Super-Committee" in Congress that failed to reach agreement, resulting in the fiscal cliff. When the leadership finally goes back to the "drawing board", they will find plenty of options available for expense reductions that both parties have agreed to at one time or another in the past.

The big deal issue, therefore, really boils down to the tax issue.

And, unfortunately, there may be only one way around it to an agreement — but it is a route which would require that the fiscal cliff actually be triggered before it can be untangled!

Room for Compromise?

The reason for that would seem to be the "Norquist pledge" that prohibits most Republicans in Congress from voting for anything that smacks of a "tax increase" — so any deal with a penny of increase in any dimension is doomed to fail in the "lame duck" session of Congress after the election.

On the other hand, however, if the Bush Tax cuts all expire as a result of the fiscal cliff, then any agreed reassessment of that in the form of legislation would involve only tax increases, not decreases. This would free the Republican signers of the Norquist pledge to vote for a deal that otherwise meets their political objectives and that erases the effects of the fiscal cliff. In effect, we will have to trigger the fiscal cliff before we can defuse it!

The financial markets will not like this kabuki dance. The stock market will plummet and stay down until a deal is done. But remember that we needed a stock market crash back in 2008 to get the "TARP" package finally passed after it had been rejected in the House of Representatives. It saved our banking system from imminent collapse.

Apparently, a sequel to this movie will be playing in time for us to see it this holiday season.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.