What frustration. Certainly I was pretty geared up for the 2009 parliamentary elections in Israel, hoping Kadima would hang on to power, allowing Livni and Abbas to ride off together into the sunset and create the Palestinian state. In retrospect, this was pretty optimistic, and I don't just mean that Kadima lost power to Likud. It probably wouldn't have worked out all that well even if Kadima had taken power, as Palestine still seems to not be in a place where it can run a respectable state, especially in Gaza.
So, first thing's first: the Middle East will be a nasty and inhospitable place for US interests until Palestine gets its own state, period. And yes, I understand that such a goal is highly complex and wrought with problems, many of which are directly the faults of the Palestinian people. But ultimately, it is in the interest of the US and Israel alike to have a Palestinian state with a healthy economy. If I had my druthers (and I rarely do), we could hand Gaza to the Egyptians and merge Palestine and Jordan back into Trans-Jordan and make it the problem of some already-relatively-stable governments to keep a lid on Palestine, but that's not going to happen.
But an independent Palestinian state (and one that, in particular, is content with its borders, which is going to be pretty tough to come by) will mean relative security for its people, and a situation in which aggression on border issues or whatnot with Israel would make life sufficiently worse as to not be worth it. Palestine, as a stable and economically viable state, would have nothing-to-gain-and-everything-to-lose by fighting with Israel, and would therefore have a strong interest in keeping a tighter lid on its more fanatical rocket manufacturers.
And this last decade looked like we were making pretty good progress! The election of Abbas, who should have been seen as a godsend to the West, gave the distinct impression that the Palestinian people were tired of intifadas and ready to sit down, talk, draw some lines on the map, and move on with their lives. The moderate Labor party in Israel showed similar promise. Both sides looked ready to take the risks necessary (and probably suffer through the ensuing pain necessary) to get to that key treaty that we've all been waiting for. But what the heck happened?
The big clincher was probably the Olmert scandal. His loss of moral authority castrated him from being able to drive the necessary treaties through parliament; serious delays popped up. By the time Livni was in a position to do the negotiating, Obama had been elected and the Palestinians wanted to wait around for him (perhaps hoping to gain a strategic advantage from losing an American president that they perceived to be pro-Israel). The elections came, Netanyahu won, settlement-building ramped up, and everybody got very angry at each other again.
Not, of course, that the war in Gaza helped things any--had Israel successfully "dismantled" Hamas, life might be a bit different. But in failing to do so, they were left with only a battered reputation.
At this point, Netanyahu is barely humoring the idea of an independent Palestinian state: he wants it to be fully demilitarized, and wants Israeli settlements to grow into the West Bank "naturally," with the population (and has not made it clear as to what would happen to those settlements if a Palestinian state gets built). Further, he's insisting that all of Jerusalem would stay in Israel. It's a tough stance to negotiate with, even for Abbas. Perhaps the strategy is to try to squeeze more to the Israeli side in a compromise, but at some point, one's demands are so high that the other side is incentivized to walk away from the negotiating table at all.
And so I think that Israel and Palestine are now significantly farther from where they were in, say, 2007, as far as being close enough in official policy to negotiate a compromise and create a Palestinian state. The moderates made key mistakes that blew their opportunities to make serious headway in the 2000s, and they will probably have to wait through another relatively painful cycle before they can make another reach for some sort of steady-state solution.