Josh asks "why State?" of all departments, has such a fondness for contractors in general and Blackwater in particular. I’ve got two suggestions, one based on reality and one on my tinfoil hat.
First, if you look back at the battle between DOD and State in 2003–in which Bush had officially sided with Colin Powell on the approach to reconstruct Iraq, but in which DOD and OVP managed to at least undermine Powell’s best efforts and in key ways to completely defeat it, it becomes clear the degree to which DOD and OVP were using military resources to win bureaucratic battles. This was most notable in the way DOD ferried Ahmed Chalabi around Iraq, always swooping him into place just before an official State event designed to build some kind of consensus on the ground involving all sectors of Iraqi society. Because DOD controlled all the logistics in the country, they could always present State with a fait accompli every time State initiated efforts to build more lasting institutions.
The contracts with Blackwater started ballooning in mid-2004, and had most of their growth while Condi was Secretary of State. It seems clear that, by 2004, it was crystal clear that State could get nothing done–not even uncontested reconstruction activities–without their own army so they could match the logistical flexibility of DOD.
So that’s my real reason. But there’s another thing I’ve kept in mind for a while. The fabulous melting embassy in Iraq–owned by State–is alleged to be slotted for hundreds and hundreds of intelligence personnel. Given the degree to which we’ve outsourced our intelligence functions, is it remotely possible that some of what we’re seeing Blackwater do in the name of State is actually servicing the spooks in Iraq, who also use their services? I don’t know the answer to this one–it’s just speculation. But it has been lurking in my brain for some time.