Watching Obama maneuvering the treacherous terrain of Middle East policy has been a pleasure. History will show that those who regarded him as a naive idealist did so at their peril. Netanyahu is slowly waking up to reality; others might do so too late and find themselves under the White House steamroller. The Obama administration is as serious about its ideals and goals as it is cunning about achieving them.
The decision to start off by challenging Netanyahu on settlement construction was nothing short of brilliant. Simply put, Obama and America had nothing to lose by pressuring Bibi on this. No serious person in American politics would today sacrifice their credibility by arguing that Israel should be allowed to expand settlements as it sees fit. In the U.S., there is a small number of (mostly religious) American Jews who still believe in the enterprise, but they were against Obama from the beginning, and the delusions in which they have been living are now colliding with the hard facts. The only remotely palatable argument, voiced by Netanyahu's propagandists such as Charles Krauthammer, that Israel should at least be allowed to expand settlements in order to accommodate "natural growth" in these communities, is itself a huge concession. Moreover, it too has been rejected by the Americans.
As other commentators have observed, the more Netanyahu and the Israeli lunatic fringe (like it or not, this is how policy makers in Washington view everyone right of Netanyahu) fight with Obama, the more pathetic and/or racist clamoring emanates from their midst, the more U.S. diplomats stand to gain in their negotiations with the Middle East's other regional powers and domestically.
The strategy followed by the Obama administration vis-à-vis the Israeli-Arab conflict and the region is best described as Machievallian liberalism. Right now, he is trying to make the Israelis understand the limits of their power and to force them to make policy choices in response to these constraints. These constraints have in fact always existed, but in the past Israel benefited from subsidies of good will (on the part of the U.S.) to overcome them. But over time, subsidies of this nature cause inefficiencies and distortions that become unsustainable.
Now, for the first time in a while, Israeli leaders are being forced to act as consumers (and producers) in a free market, where prices reflect the supply and demand of political, military, and economic power. Unfortunately, the subvention of lunacy has rendered some groups in Israeli society extremely uncompetitive in the marketplace of political ideas and in the practice of power. The settlers, for example, who think Israel can do just fine without America, are suffering from delusions of grandeur typical of corporations who have benefited from state largesse for years.
The new calculus is very simple. You want to keep building settlements? Pay for it. You want to waffle on a two-state solution? It will cost you. You want to be able to shape responses to the Iranian problem? Quid pro quo.