In the past day I've talked to some folks smarter than myself (most notably my friend Clint), and our conversations revealed some tremendous insight.
There was one major mistake along the way that could have been avoided completely, and it has put all parties in the situation in difficult corners: Ayatollah Khameini, rather than waiting the traditional (and possibly legal?) 3 days to announce the winner of the election, the Supreme Leader chose a mere hour after the election to announce the "divine victory" of Ahmedinejad. Why? If we assume that the election was rigged, and that the Supreme Leader was involved, then he has a very strong incentive (and probably a bit of worry) to make the elections seem as legitimate as possible. So when Mousavi declared victory (claiming, even that he had a leak from the election commission), Khameini did everything he could to try and crush from the outset any momentum Mousavi may have gained, in an attempt to stop what's happening now from ever happening.
This was an error for two reasons. First, it was so very odd that it could not be seen as anything but calculated. Never before has the Ayatollah called an election before 3 days have passed, and calling it in a mere hour is obviously a strategic move. Such suggests that something is amiss (in this case, it bolstered the already-significant evidence that the election was rigged from the top). But more importantly, it put the Supreme Leader firmly in the Ahmedinejad camp, giving him very little room to maneuver, and very few good exits if things didn't go smoothly.
And then they didn't go smoothly. Now, Mousavi and his gang of youngsters are standing up and demanding the vote be annulled. Obviously if Khameini annulled the vote after praising it, he would have serious legitimacy problems himself. His leadership would be questioned, his impartiality would be laughed at. So he has compromised a bit--he is supporting a "recount," but insists that any serious challenges to the regime will be met by the Republican Guard. The recount is a 12-day total event, which is strategic as well: it is just long enough that he hopes to sap the protesters of some energy and momentum, and short enough that it does not make sense to stage a full-time sit-in in Freedom Square (ala Tiananmen).
And many friends of mine have likened this situation to that of Tiananmen, but there are a few differences. First, it's short (Tiananmen was a month in coming before the major crackdown). Second, the youngsters/reformers have not yet taken control of the city (whereas China had lost all control of Beijing by the time the tanks had to smash in). Third, new technology (and limited control by the Iranians over it) has allowed for constantly-shifting information and communication sources, proxies, etc, that are evading government attempts to shut it down. Finally, the protesters are actually making an ultimately much smaller, much more legitimate, and much more conceivable demand: instead of asking for Democracy from scratch, they are simply asking that the vote be counted honestly--and Mousavi is (or at least was) not a major challenger to the legitimacy of the Religious regime (though Khameini may have forced him into that camp, and Mousavi has taken advantage of it: rather than appealing to Khameini, he appealed to the more religiously academic Guardian Council, who were the first to note the irregularities). But most importantly, the kids of Tehran are very different from the kids of China. While the Chinese regime was built on a rebellion, Confucian culture had, for thousands of years, emphasized the importance of the relationship between leader and subordinate. It is ingrained in Chinese culture, even today--the Cultural Revolution was a very strange departure from that, and it was one that the Chinese very firmly put behind them as soon as it was over. Rebellion was a bit strange and foreign to many of the Tiananmen youngsters, and when they got shot at, they scattered.
But it will not be so easy for the Iranian regime. Already, the volunteer Basij (a pro-government milita) stormed the university that many protesters were camped in, smashing, looting, and beating. Basij has shot and killed 8 protesters, and wounded 28 more. There have been street clashes with rocks, batons, fire. The protesters have already set fire to a Revolutionary Guard building that the Basij worked out of. These are unlikely the makings of a successful violent revolution, but it is clear that the protesters are not afraid of violent conflict.
And so we look to Iran's history for the explanation of such an embrace. Shia Islam was built, thousands of years ago, on rebellion. It was a proclaimation that the Sunni Caliphate was illegitimate, and that disobedience of evil leadership was a virtue. The Shiites were (in the past) the primary terrorists/assassins of Islam, and the Iranian Revolution was a predictable (rather than strange) consequence of the CIA-installed Shah. Since then, Iran has proudly indoctrinated its children with this rebellious spirit--it's why Iran's domestic politics allow its foreign policy to be so rogue and confrontational in nature. In the war against Iraq, millions of youngsters donned red bandanas and literally ran across open desert, unarmed, at machine gun emplacements and tanks, howling like banshees, climbing over their dead brethren, in order to either join the Martyrs or rip the Iraqis apart with their own hands. They suffered immense casualties, but their will never broke. This is the legacy that these kids inherit. And now, Iran's most dangerous weapon to any outsider has now been turned, in part, on the regime. These kids will accept conflict, violence, and casualties, and they are not afraid to inflict them. Trying to break up the millions of Tehran protesters will be a whole heck of a lot harder than breaking up Tiananmen. And it will turn a huge chunk of the country (even tentative supporters of Ahmedinejad) against the regime for a very long time, should it happen. It would seal that the regime rules by force, terror, and authoritarianism, rather than by the will of its people. Such an outcome would be disastrous, even if the protesters went home.
So Khameini must find some way to end this. If he does not, he is doomed. But he is in a very difficult position, and that makes him incredibly dangerous: he cannot simply call Mousavi the winner. He would undermine his own authority and anger a different very large chunk of the population in a similar way. The recount still has the potential to lead to another vote--either that, or it will simply erode Ahmedinejad's lead and declare him the winner anyway. Both moves are difficult. But I do not believe that telling the protesters, "recount done, Ahmedinejad won, go home," is likely to work. Any exit now is going to be bad for the regime, but perhaps, the least bad way is to rig the "recount" such that there is a second vote, and let Mousavi squeak by with a victory.
If Khameini is foolish (and he rarely is), he will seek some exit where he takes almost no political flak. This would make him the most dangerous of all, as he would do something neither I nor my friends have yet predicted. But tomorrow, millions (likely) will assemble in Freedom Square, once again defying Khameini's decree, to mourn the dead protesters with Mousavi leading the entire gang. While foreign journalists are not prestent, Twitter and Facebook still are, and their ever-watching eye will make this public. Mousavi is putting the regime in a difficult place: let him stand up defiantly and do as he pleases, or brutally force him out and kill dozens, hundreds, or even thousands of Iran's finest youngsters? Both options are terrible. Tomorrow will be a dangerous day, and Mousavi knows this. Many of his supporters know this.
Even if they manage to kill Mousavi, there are others. Kharoubi is an excellent second choice for the reformers, and even more liberal than Mousavi. He could take the helm, with a newfound fury from the reformers.
But Khameini is clever, despite his recent mistakes. And the Guardian Council's support of the recount means he is under a lot of pressure to not simply try and crush this defiance. I am not sure what he will do in the long term. Tomorrow, he is likely to send the police to try to keep the protesters off-balance, but is unlikely to authorize deadly force. Unfortunately, this is likely to have little effect. All we can do from here is watch and hope, and see what he will do.
I leave you with some of the more compelling pictures of the conflict so far.