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Arafat was making some noises towards peace (very quietly, but at least he was less vocal in support of siuicide bombers), and the situation seems (to someone who only watches the news) to be improving.
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The nice thing about Arafat was that he's gone through the classic terrorist-to-statesman process - often happens to terrorists who don't get killed - the hot-headedness goes and the realisation dawns that talking is the only thing that actually works (of course what you want to do is find the talking ones earlier). At this point you can get somewhere, presuming that some idiot doesn't murder the person you're talking to, as happened to Yitzhak Rabin (a conservative right wing Israeli killed him, remember).
Remember that 'we don't talk to terrorists' only applies for a given value of 'terrorist'.
Bush is good for the Middle East if what you think the Middle East needs is more fundamentalists trying to bring about Armageddon.