Streetwise Professor

Although by some measures (such as debt-to-GDP and deficit-to-GDP ratios) Russia’s fiscal situation appears favorable relative to that of the United States, for a variety of reasons, and for now, the US can finance its massive and burgeoning spending in a way that Russia cannot match.  The fiscal strain in Russia, with a deficit of 5.4 percent of GDP, is forcing Finance Minister Alexi Kudrin to search for ways to plug the gap.

For one, he is encouraging bad habits–like cigarette and alcohol consumption  (H/T S/O):

Smoke and drink more, Russia’s finance minister Alexei Kudrin urged citizens on Wednesday, explaining that higher consumption would help lift tax revenues for spending on social services.

“If you smoke a pack of cigarettes, that means you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates,” Kudrin said, quoted by the Interfax news agency.

“People should understand: Those who drink, those who smoke are doing more to help the state,” he said, offering unconventional advice as the Russian government announced plans to raise excise duty on alcohol and cigarettes.

In present value terms, this is definitely a loser, even when evaluated from the narrow perspective of government funding, and ignoring the total costs to the Russian population.  The present value of the future costs to government revenue resulting from greater consumption of these goods, in terms of early mortality (and the consequent loss in earnings–and hence taxes) and greater health care expenditures almost certainly exceed the value of the short term revenue jolt this higher consumption would provide.

It is also sad to see Kudrin sink to Orwellian arguments like: “If you smoke a pack of cigarettes, that means you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates.”  Translation: kill yourself so we can pay others to have babies!

Huh?  And come on: these measures are necessary to pay for existing programs, not to pay for new initiatives.

But the financing constraints of the Russian government (which reflect, in large part, the nation’s perceived unreliability as a political risk) and the relentless presentism of the government (which I’ve written about before, and which arises from a variety of causes) mean that Kudrin has to let the future care of itself.

How nice.  It’s also interesting to note how Kudrin has learned his lesson from Gorbachev and Perestroika.  Gorbachev cratered the USSR’s already shaky financial condition (with oil revenues down due to plunging prices and plunging production, and imports up due to agricultural failures) by cracking down on vodka sales.  Less vodka sales, less taxes.  Another nail in the Soviet coffin.  Kudrin isn’t going to repeat that mistake!

Moreover, the fiscal crunch is also driving the prospects for the sales of stakes in Russian state companies, like bank VTB, and Rosneft.  This initiative is on the slow track, however, with an announcement that there will be no sales in 2010, and no decisions have been made about what firms, and how much of them will be sold in in 2011 and beyond.

Here Russia’s reputation again is hurting it.  The Russian government will retain control of the corporations, and given protections for minority shareholders, and the prospect for re-nationalization (on dictated terms) at some future date, mean that the price the country would get is likely to be discounted heavily.  Put differently, this is not a conviction privatization, driven by a recognition that reducing government ownership and control would improve efficiency; it is a desperation sell-the-family-jewels-gambit where the buyer realizes that he doesn’t get them free and clear and may have to sell them back at an unfavorable price later.  Thus Russia is unlikely to get the price that it wants, but may be forced to sell anyways even at a big discount to meet its pressing fiscal demands.

Some folks have pretty much figured this out:

Troika Dialog economist Anton Strutchenevsky said the lack of certainty in the government’s position is evidence of the fact that the government sees privatization as an ad-hoc measure, necessitated by the need to fill the black hole caused by the shortfall in budget inflows of oil money. “If, hypothetically, the price of oil jumps to $100 per barrel today, the government will trash all these privatization plans,” Strutchenevsky said. He pointed to another “weak point in the program,” which he said makes the whole scheme looks like half-measures. “The state will continue to control and manage most of the enterprises and corporations slated for privatization, since it will retain some 50 percent plus share in most of them,” he said. “You cannot privatize without transfer of some ownership and control. Few investors want to sleep in bed with a government that makes all the investment decisions.”

So, Russia is in the situation where its fiscal choices include inducing the population to kill and incapacitate itself more quickly in order to raise more taxes today, and selling shares in state companies at big discounts that reflect its inability to credibly protect the buyers.  With the price of oil drifting lower the pressure to make these unpalatable choices have only increased.

The best BRIC.  Ha!

Obama’s recent interview with Brian Williams contained a couple of doozies.

The first was his response to a question about Glenn Beck:

I — I do think that it’s important for us to recognize that right now, the country’s going through a very difficult time, as a consequence of years of neglect in a whole range of areas. Our schools not working the way they need to, so we’ve slipped in terms of the number of college graduates, you know?

A financial system that was not, you know, operating in a way that maintained integrity and assured that the people who were investing or who were buying a home or were using a credit card weren’t getting in some way cheated. We had a health care system that was broken and that was bankrupting families and businesses. All those issues are big, tough, difficult issues. And those are just our domestic issues. That’s before we get to policy issues in two wars. And a continuing battle against terrorists who want to do us harm.

So, given all those anxieties — and given the fact that, you know, in none of these situations are you going to be fix things overnight. It’s not surprising that somebody like a Mr. Beck is able to stir up a certain portion of the country. [Emphasis added.]

This is just a variation on the “anxious bitter clingers” theme.  Moreover, it ain’t him, Obama is saying: it’s the anxious times in the country.

But even on a superficial level it makes no sense.  Glenn Beck was around on election night, 2008.  He was trying to “stir up” stuff back then.  Didn’t work, obviously.

Moreover, Obama has also claimed that since his election (a) he has put the country back on the track to a healthy economy, indeed bringing it back from the brink of utter collapse, (b) fixed the health care system, and (c) fixed the financial system, including provisions that he claims will make people less vulnerable to mortgage and credit card scams.  He also took credit–just last night–for ending one of the two wars he speaks of, and putting the other on a trajectory to an American exit.   So, according to Obama, he is putting the country firmly on the path to prosperity and peace.

So, if you believe Obama’s pitch, all of the factors he lists as the sources of discontent in the country should have gotten better since he was elected, and it should be harder for Glenn Beck to stir people up today than in months past.  But it is clear that discontent has risen dramatically since Obama was elected; Glenn Beck and Sarah Palin couldn’t have attracted a fraction of the crowd they did on Saturday in November, 2008 or even in August of 2009.

Obama’s explanation of the Beck phenomenon is therefore clearly false; or at least, it is impossible to square with his statements about his accomplishments.  And the most plausible explanation–that this and myriad other political developments are a reaction to, no a reaction against, Obama–is something that he just cannot face.  (And I should say that Beck is riding the wave–he didn’t create it by any means.)

The other doozy relates to a peripheral–or, perhaps more accurately, fringe–issue, but one that is telling in its own way:

Well, look, Brian, I — I would say that I can’t spend all my time with my birth certificate plastered on my forehead.

Well, look, Barack.  Nobody is asking you to spend “all your time”  with your birth certificate plastered on your big old forehead.  That argument is another soldier in your army of straw men.   Some people are asking you to just, you know, show it.  Like once.  One look would be enough.  Then everybody would be satisfied.  It should take about 10 seconds of your time to authorize the release of the certificate.  Then nobody would hound you about your citizenship ever, ever again.  You would presumably be happier not being slandered by ignorant boobs.  Indeed, you would prove that those questioning your birthplace indeed have hyperactive–and arguably paranoid–imaginations.  Seems like a winner for you.

Adamant disclosure.  I am not a birther.  I believe that Obama’s coyness about his birth certificate is an Alinskyite gambit, intended to get a certain excitable portion of the population, uhm, stirred up, and embarked on a snipe hunt.  By so doing, he discredits them and allows him to paint his opposition as a whole as unbalanced.  It also allows him to play the victim–which he does in this interview–presumably to attract sympathy.

Very clever.  But hardly presidential.  It is cynical and manipulative and divisive, and contributes to the poisonous political atmosphere.  It distracts attention from the real issues he claims to be so serious about addressing.  There is no honorable reason not to release it.

This interview gives an idea as to why Obama has transformed from political messiah to political leper.  He insults vast swathes of the electorate, insinuating that they are conspiracy theorists, and so stupid and emotionally damaged that they are prey to being stirred up by exploitive demagogues (as he paints Beck).  He fails to confront the real reasons for his unpopularity in an honest way.  He advances wildly inconsistent theories–he’s clearly making things better but everybody thinks that they’re worse.  He plays low political games.

He needs to remember the first rule of holes: when you’re in one, stop digging.  But instead, he’s just redoubling his shoveling.  And in so doing, he is digging his political grave.

On 1 September, 2005, the attack by Islamic terrorists of diverse nationalities on School Number One in Beslan began.  It ended two days later, with hundreds dead, many of them schoolchildren.

May the innocent rest in peace.

Beslan is wrapped in more uncertainty and controversy than other horrific events during the Putin years–Ryazan, the Kursk, Nord Ost, the Moscow Underground bombing.  That’s saying a lot, because the competition is pretty intense.

Time allowing, sometime over the weekend I’ll try to put together a few thoughts on Beslan and its legacy.

Obama’s speech on Iraq seemed listless and perfunctory.  Much of it was boilerplate–no surprise there.  Some of it was disturbing, most notably his continued ambivalence on Afghanistan:

Within Afghanistan, I have ordered the deployment of additional troops who-under the command of General David Petraeus -are fighting to break the Taliban’s momentum. As with the surge in Iraq, these forces will be in place for a limited time to provide space for the Afghans to build their capacity and secure their own future. But, as was the case in Iraq, we cannot do for Afghans what they must ultimately do for themselves. That’s why we are training Afghan Security Forces and supporting a political resolution to Afghanistan’s problems. And, next July, we will begin a transition to Afghan responsibility. The pace of our troop reductions will be determined by conditions on the ground, and our support for Afghanistan will endure. But make no mistake: this transition will begin – because open-ended war serves neither our interests nor the Afghan people’s. [Emphasis added.]

He throws a small bone to the critics of his Afghanistan policy with his remark about “conditions on the ground.”  But everything else in the statement–including the phrases I’ve italicized–clearly indicate that the American commitment is tightly circumscribed.  Moreover, the commencement of the drawdown is written in stone (“But make no mistake: this transition will begin”).  The only flexibility is on the pace of the drawdown–not its inevitability.

This is all delusional because the goal of his policy–Afghanization, the building of Afghan capacity to secure the country’s future–is completely incompatible with this cramped timeline.  It is widely recognized that Afghan state and military capability are years behind Iraq’s, and there are grounds for concern about the viability of Iraq’s as an independent entity even after many years of robust American support and training.  So there is no way Afghanistan will be capable of what Obama wants in July of 2011, or years beyond that.  If we are lucky, the drawdown in Afghanistan will commence when we are at the end of the beginning of the beginning.  This is a disaster in the making.  A warm up the helos and clear the roof of the embassy-type disaster.

But that’s not the main thing that struck me about the speech, because it was completely in line with his previous statements.  What hit me was the clunky attempt to “pivot” to the economy.  This was hardly a thing of grace, and in its own way is quite revealing:

Unfortunately, over the last decade, we have not done what is necessary to shore up the foundation of our own prosperity. We have spent over a trillion dollars at war, often financed by borrowing from overseas. This, in turn, has short-changed investments in our own people, and contributed to record deficits. For too long, we have put off tough decisions on everything from our manufacturing base to our energy policy to education reform. As a result, too many middle class families find themselves working harder for less, while our nation’s long-term competitiveness is put at risk.

And so at this moment, as we wind down the war in Iraq, we must tackle those challenges at home with as much energy, and grit, and sense of common purpose as our men and women in uniform who have served abroad. They have met every test that they faced. Now, it is our turn. Now, it is our responsibility to honor them by coming together, all of us, and working to secure the dream that so many generations have fought for -the dream that a better life awaits anyone who is willing to work for it and reach for it.

Our most urgent task is to restore our economy, and put the millions of Americans who have lost their jobs back to work. To strengthen our middle class, we must give all our children the education they deserve, and all our workers the skills that they need to compete in a global economy. We must jumpstart industries that create jobs, and end our dependence on foreign oil. We must unleash the innovation that allows new products to roll off our assembly lines, and nurture the ideas that spring from our entrepreneurs. This will be difficult. But in the days to come, it must be our central mission as a people, and my central responsibility as President.

Note the direct assertion that the same kinds of things that work in a military campaign are what are needed to rejuvenate the economy.  This is not new.  Statists are fond of using military metaphors to describe the economy, and military style, command and control, methods to address economic issues.  Lenin’s writing is littered with military metaphors.  (And no, I’m not saying Obama is a Leninist.)  Ditto fascist economic tracts.  (And not saying he’s a fascist either.)  In the US, during the New Deal, military metaphors and command and control type measures to address the crisis were all the rage.   In the 1970s, Carter said that fighting the energy crisis was the “moral equivalent of war,” and attempted to implement a raft of centralized, government-driven initiatives to deal with energy.   Statists rattle the economic saber at every opportunity.

Obama’s speech reflects a similar mindset that the economy is something that is amenable to central direction and control, like a military campaign, as does his recent statement on the economy:

“Every single day, I’m pushing this economy forward, repairing the damage that’s been done to the middle class over the past decade and promoting the growth we need to get out people back to work,” Obama said in his statement.

General Obama, leading the economic charge.  ”Fighting for economic recovery on all fronts.”  He called for a “full-scale attack” on economic issues, and called on the Republicans to end their “blockade” against a “jobs bill.”  It is amazing that a man that is so painfully, obviously diffident–at best–about his real military responsibilities as Commander-in-Chief is so aggressive in his deployment of military imagery–and centralized, quasi-military methods–on economic matters.

This is fundamentally wrongheaded, and actually destructive.  The economy is not an army, to be commanded and directed.  Centralized methods founder on information and incentive problems, and the daunting complexity and interconnectedness of the economic system.  Attempts to centralize invariably impair efficiency, and stymie growth, rather than the reverse.  This is particularly true when helter skelter attempts to restructure massive parts of the economy create pervasive uncertainty that paralyzes private decision makers.  Military-style, centralized, command and control methods are the last thing the economy needs to prosper.

I’ve said before that the greatest lesson of the Great Depression is that we learned the wrong lessons from the Great Depression.  There was at the time (notably at Chicago), and increasingly so today, a recognition that the dirigiste thrust of Roosevelt’s policies and the great uncertainty created by the improvisational nature of the centralized policies exacerbated the depth and duration of the Depression.

This is a plausible reading of the current situation as well.  If Obama truly views economic matters in the way suggested by his rhetoric, as something amenable to centralized, hierarchical, military-style methods, we can anticipate a continuing, stumbling recovery, if we’re lucky.  In other words, General Obama’s ringing call to economic arms will not lead us to victory, but to quagmire–to appropriate a word so beloved of his ilk.

I saw the headline of this Matt Leising article, “Lehman Derivatives Records a Mess,” and reflexively thought it would be about its OTC trades (of which there were, if memory serves, over 900,000 if memory serves).

I was wrong.  It was about its exchange traded–and cleared–positions:

Barclays PLC had no idea how big Lehman Brothers Holdings Inc.’s futures-and-options trading business was when it considered taking over the defunct bank’s derivatives trades at exchanges in 2008, a Barclays executive said.

“Lehman’s books were in such a mess that I don’t think they knew where they were,” Elizabeth James, a director of Barclays’s futures business, testified today in U.S. Bankruptcy Court in Manhattan. James worked on Barclays’s purchase of Lehman’s brokerage during the 2008 financial crisis.

She said she received an e-mail from former Barclays trading executive Stephen King saying Lehman had “absolutely no idea” if it had sold $2 billion more options than it had bought, or whether it owned $4 billion more than it had sold.

. . . .

Transferring margin together with trading positions “is normal practice in the ETD business,” she told U.S. Bankruptcy Judge James Peck, referring to Lehman’s exchange-traded derivatives. “You’d be crazy if you didn’t.”

She said Lehman’s lack of records initially prevented her from performing “due diligence” to discover what Lehman’s and its customers’ positions were, where Lehman kept its bank accounts, and who its brokers were.

James said she had seen a tabulation of Lehman’s positions at the Options Clearing Corp. showing that the daily margin requirements for its trades had varied by as much as $1 billion within a few days in September 2008.

Moral of the story: moving more trading to exchanges, exchange-like systems, and clearing will not necessarily lead to greater clarity about the positions that big entities like Lehman hold.  One of the arguments for clearing has been that it will improve regulatory transparency, and help regulators figure out where the risk is and who is exposed to whom.  Even overlooking the basic fact that it is possible to have centralized trade reporting without mutualizing credit risk through clearing, the Lehman story shows that this alleged advantage has been vastly oversold.

Big complicated firms have big, complicated, and dynamic positions that are hard to keep track of, regardless of where and how they are traded.  There is a long, long, long way to go before even approaching the ideal of “mapping” risk in the financial system.  More centralized collection of information is a necessary, but by no means sufficient, condition to achieve this goal.

The Lehman story should be a cautionary tale to all those who naively believe that waving a legislative wand and casting a spell that drives trading to exchanges will magically eliminate all of the huge operational difficulties associated with measuring and managing risk.

Ruh-roh.

An airport trade is when somebody puts on a trade far bigger than he can afford.  He then heads to the airport with a one way ticket to a foreign nation, preferably one without an extradition treaty.  If the trade is a winner, the guy enjoys a blowout vacation then returns as the conquering hero.  If the trade is a loser–well, welcome to Margaritaville.

There are rumors ricocheting around the internet and news that Chinese Central Bank Chairman Zhou Xiaochuan has defected to the United States.  The original version of the rumor, according to Stratfor, related to a huge loss on Chinese investments in US securities:

The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within the PBC, including Zhou.

Uhm, no.  Completely implausible.  US Treasury data show that in mid-2009, China owned about $760 billion in Treasuries, and about $450 billion in agency securities.  There is no way that it could have lost $430 billion on these positions, obviously.  Especially since Treasuries have been up recently.  Indeed, people are speaking of a Treasury bubble.

To lose huge money on Treasuries in this market you’d have to be short.  Friend and frequent commentor Charles does a quick back of the envelope calculation, and figures that somebody would have to be short about $4.5 trillion in Treasuries.  Zero Hedge calculates $3.5 trillion.  Either way, no way.  Like anybody could put on such a position with nobody knowing.

But Zhou hasn’t been seen.  Internet searches on his name have been blocked in China, as have websites carrying the rumor.  The rumors of  defection are flying fast and furious.  Chinese repo rates spiked.  There’s smoke, so what’s the fire?

One story is that this is all part of a power struggle in the leadup to a transfer of power in 2012.  Given the opaque nature of Chinese politics, this is plausible.

But here’s another, more ominous possibility.   Helicopter Zhou has overseen massive injections of liquidity into the Chinese market to fight the financial crisis.  There are widespread worries about a housing bubble, and the cracking thereof, with disastrous consequences for banks.  Similarly, there are myriad reports about massive quantities of bad loans, including huge amounts to local governments.  The recent bank “recapitalization” plan, which seems to have more in common with a three card monte game than a real recapitalization, only adds to concerns.

Put all this together, and it is plausible that Zhou has realized that the whole structure is on the verge of collapse, and that he is the natural fall guy.  So, he’s getting out while the getting is good.  The biggest airport trade, ever.

This bears watching.  If the rumors are true, and his defection/departure has anything–anything–to do with a deteriorating financial and economic situation in China, we are all in for a hell of a ride.  What exactly?  Who knows?  Commodity prices would likely crash.  But beyond that, given the opacity of the Chinese economy, financial system, and political system, it’s difficult to know how they would react and what the effects of their actions would be, either in China or the larger world.

Keep your eye on this one.

It is flattering to know that the always insightful (and knowledgeable) David at Deus ex Macchiato found insightful my observation that capital requirements can result in crowded trades–and hence systemic risk.  I think the idea is pretty straightforward.  It’s all about incentives.

Risk-based capital requirements are like a regime of price controls, in this instance, risk price controls.  If some risks are mispriced, and particular, priced too low, all affected institutions face the same incentives to take on those particular risks.  The more institutions that fall under the capital regime, the more institutions that will take on these underpriced risks.  That’s why I am very leery of global capital regimes, a la Basel.  If they screw up the prices–and screw them up they will, with metaphysical certainty–the effect of the perverse incentives will be global.

David suggests the need for regulators to set up capital arbitrage groups to address this problem.  The foregoing suggests that these groups should look for the stuff that everybody is doing–those are the risks that are likely to be mispriced.

The problem is that because everybody is doing it, if the regulators try to crack down, the political pushback will be intense.  For evidence of this, see this dispiriting paper about how those who went into the subprime craze succeeded in getting Congress to add fuel to the craze, rather than crack down on it.  Moral of the story: subsidies (underpricing) tend to create constituencies that favor the continuation of the subsidies.  (Cf. the American sugar program, or farm programs generally.)  As a result, I think that cap arb groups inside regulators will be about as effective as the war on drugs.

Not everybody is so impressed with my argument.  Synthetic Assets, for example:

Craig Pirrong and David at Deus ex Macchiato are worried that the minimum capital requirements set by Basel III will face the same problems as those created by earlier versions of Basel:  As banks seek to minimize their capital positions they are all pushed by the regulations into the same trades, this leads to the growth of unregulated financial sectors and crowded trades.

The question I have for proponents of this view is:  Why would a bank seek to minimize its capital position, when the purpose of capital is to protect the firm against unpredicted — or even unpredictable — losses?  There’s a reason Jamie Dimon has been feted for his “fortress balance sheet” approach to the crisis that everyone — including Chuck Prince — could see coming.

Whenever minimum capital requirements are the determinants of bank behavior, that’s a good indicator of a deep structural problem with the financial system, because it means that you have a financial system populated by banks that are more concerned with maintaining profitability in the short-run than with ensuring that the bank is a viable entity in the long-run.  In short, when banks are maintaining only minimal levels of capital, you have pretty clear evidence that repeated bailouts have resulted in the complete perversion of financial system incentives.

SA–with all due respect, you miss the point.  Neither I nor David (if I can speak for him) anywhere claim that banks set capital levels at the absolute minimum.  It is evident though, that they do economize on costly capital (their shareholders demand it), and make asset allocation decisions strategically in response to the incentives inherent in capital rules.  There is no way to explain what transpired in the lead up to the crisis without understanding the crucial role of capital requirements, most notably the extremely favorable capital treatment accorded to AAA rated CDOs, SIVs, etc.  You’d have an easier time explaining Hamlet and leaving out a certain prince from your telling.

Yes, banks held more than the minimum in capital.  But that was extremely misleading about the true risks in the system, because the capital requirements were fatally distorted.  The capital required against certain instruments (government debt being another example) was too small relative to the true risks of those instruments.  So too many banks loaded up on them. (This exacerbated the underpricing problem because the capital requirements didn’t take into account how the correlation in trading activity across entities increased the risks of their portfolios.)  JPM was the decided exception that proves the dreary rule.

This is a story about relative prices.  In a risk based capital regime, some risks are mispriced relative to others.  Banks load up on those mispriced risks.  Since all face the same distorted pricing signal, they tend to trade the same way.  They held more capital than they were required to, but that provided a false sense of security because the required levels of capital did not accurately reflect the risks.

There is, in fact, dysfunction in the financial system.  That dysfunction, in the first instance, is the result of the deadly combination of implicit and explicit guarantees that stoke moral hazard, and woefully inadequate and scarily expansive capital requirements that are intended to make it difficult for banks to exploit that moral hazard, but fail to do so.

That’s why I find it chilling that regulators around the world are touting capital requirements as the panacea that will prevent the next crisis, when in fact universal or near-universal requirements are more likely to be the cause of the next crisis.  It is inevitable that any requirements will misprice some risks.  Banks, motivated in part by the explicit or implicit safety net that means that they do not internalize risks, will methodically seek out those underpriced risks.  With identical, or even highly similar, capital requirements across jurisdictions, their portfolios will be overweighted towards those underpriced risks.  Everything will look just fine because the banks will say–”look, we have so much more capital than the minimum, so no need to worry.”  But the minimum is way too small.  And when those overweighted investments get hit by an adverse shock, it is a correlated shock, meaning that there is a substantial risk that the death spiral will begin, as everybody tries to get out of crowded trades.

And that’s why I think Basel–I, II, III. . . or IV, or XXIV–has been faulty, and will be faulty.  The fault is inherent in any global system to set risk prices.  The knowledge problem will kill you, every damn time.

This is, in a way, a woulda, coulda, shoulda post.  Back in July I was going to write about the Russian heatwave by referring to a book on climatology that (a) seemed to provide a cogent explanation of the process by which a brutal heat wave could be created, and (b) strenuously argued that this process had nothing to do with anthropogenic global warming.  But other stuff happened, the post didn’t get written–and now the National Oceanic and Atmospheric Administration (NOAA) has released a report validating this explanation of the heat wave.  Thus, I could have said I told you so.  But I didn’t.  So you can take me at my word that I indeed could have said so, or not, depending on your predisposition.

Anyways, during the height of the Russian heat wave, I immediately thought of the book “Global Warming: Myth or Reality?  The Erring Ways of Climatology” by the late Marcel Leroux, a well-known (and iconoclastic) French climatologist.  (I read the book in the fall of 2006.  I’ve mentioned it on the blog before.)  Leroux emphasized the decisive influence of “mobile polar highs”–high pressure cells originating at the poles, then moving towards the equator–in determining weather and climate.  With respect to heat waves in particular, Leroux argued that “anticyclonic agglutinations”–combinations of a sequence of MPHs–were to blame.  When an unusually strong series of MPHs combine, and then stall over a particular region, during periods of high insolation (i.e., the summer) that area will experience a heat wave.  Describing the infamous French heat wave of 2003, Leroux wrote:

In 2003, from June onwards, the meteorological situation was dominated . . . by th epresence of a vast area of high pressure. . . . The great stability brought about by the anticyclonic conditions–calm air, or very slight breezes, and the absence of upward air movements–encouraged the warming of air in the lower layers.  The conduction of heat, and infrared absorption, are in fact enhanced when pressures are high and the air cannot rise; the layers nearest to the ground become (for the same amount of solar energy received) relatively very much warmer.  The heating leads to a considerable diminution of relative humidity (i.e., the air becomes much drier).  . . . Now that the moisture content is absent, maximum insolation occurs, and the cumulative heating effect gradually assumes the proportions of a ‘heatwave’, especially in urban areas, which are less ‘ventilated’, and become warmer, drier, and more polluted (pp. 278-279).

When re-reading Leroux in July, that sounded to me exactly like what happened in central Russia, down to the last jot.

Recently NOAA, hardly a hotbed of climate change skepticism, has stated that the Russian heatwave fits the Leroux template exactly:

The extreme surface warmth over western Russia during July and early August is mostly a product of the strong and persistent blocking high. Surface temperatures have soared as a result of the combination of clear skies, sinking motion within the environment of the high pressure causing compressional heating of air, the lack of any temporary relief owing to the blocking of the typical cold fronts that cool the region intermittently in summer. Add to this scenario the cumulative effect of drought that began in early summer which has caused soils to dry and plants to desiccate to wilting point , thereby causing additional surface warming via land feedbacks as the blocking condition persisted. These are all well-known and studied physical processes that have accompanied summertime blocking and heat waves in the past.

Much of the intensity of the current heat wave, and also the pattern of surface temperature conditions across Eurasia during July 2010, can be recreated from the atmospheric blocking event itself. The diagnostic procedure involves standard methods applied to the historical record of analyzed 500 mb heights and surface temperatures during the prior period of 1900-2008. The method of statistical regression is used to understand how surface temperature changes during a typical blocking occurrence over Russia during July, and is a method that can be used to infer causal relationships.

The temperature pattern accompanying a “garden variety” block consists of a localized +1 to +2°C warming over western Russia, with somewhat weaker coolness toward the Urals. July 2010 was not a garden variety block, but was instead the most extreme block in the post-1900 period. While there is no analogue from which to draw an assessment of the expected impact on temperatures form such a block, one can nonetheless use the historical regression relation in order to infer the impact of this extreme July 2010 block. The process involves multiplying the regression pattern by the standardized departure of the height index observed for July 2010. The calculation offers a meaningful evaluation of the surface temperature response to the extent that the height-temperature relation is linear. The results indicate a surface warming in excess of +5°C is expected over western Russia in response to the July 2010 blocking high, accompanied by a downstream pattern of about -3°C coolness over the Urals and warmth of +2°C to +3*C over northern China, Mongolia, and northeastern Russia.

The comparison of the above reqression map with the observed temperature anomaly map for July 2010 clarifies the cause for this heat wave. The strong agreement between the July 2010 observed pattern of Eurasian surface temperatures and that pattern attributable to the impact of upper tropospheric blocking provides key evidence that the block is the immediate cause for the heat wave (and related temperature conditions over adjacent countries). Blocking events are typically of 1-2 week duration, and by contrast the 2010 situation is highly unusual in that blocking has existed over western Russia on virtually every day form the beginning of July until the middle of August. The cumulative impact of such prolonged blocking has led to the extreme nature of the surface impacts on temperature, soil conditions, and rainfall.

The near universal response to the Russian heat wave has been–I’m sure you’re surprised–to attribute it to global warming, or climate change, or whatever the nom de jour might be.  This continues even after NOAA weighed in, with drivel like this in the FT.

To attribute this to a secular global temperature rise, it would be necessary to show how such a rise would affect the likelihood and severity of such “blocking events” (anticyclonic agglutinations in Leroux’s terms).  Leroux said it could not be done, generally, and indeed was nonsensical: if a rise in temperatures (forced by GHGs) was the underlying mechanism, pressures should drop (p. 279) because, duh, hot air rises–unless the rise is blocked by a high pressure wave resulting from some other process.  (Other climate skeptics, notably Richard Lindzen, postulate that the rising hot air results in a negative feedback mechanism that substantially reduces the temperature increase resulting from a given increase in GHGs.)

Moreover, NOAA refuses to attribute the blocking events to a secular climate change process:

Despite this strong evidence for a warming planet, greenhouse gas forcing fails to explain the 2010 heat wave over western Russia. The natural process of atmospheric blocking, and the climate impacts induced by such blocking, are the principal cause for this heat wave. It is not known whether, or to what exent, greenhouse gas emissions may affect the frequency or intensity of blocking during summer. It is important to note that observations reveal no trend in a daily frequency of July blocking over the period since 1948, nor is there an appreciable trend in the absolute values of upper tropospheric summertime heights over western Russia for the period since 1900.

The indications are that the current blocking event is intrinsic to the natural variability of summer climate in this region, a region which has a climatological vulnerability to blocking and associated heat waves (e.g., 1960, 1972, 1988). A high index value for blocking days is not a necessary condition for high July surface temperature over western Russia—the warm summers of 1981, 1999, 2001, and 2002 did not experience an unusual number of blocking days.

It should also be noted that the warming was extremely localized, that the Southern Hemisphere actually experienced substantial cooling, and the pattern observed in 2010 was less “global” than the pattern during the comparable event in Russia during the summer of 1936.

The contrasting patterns in parts of the Northern and Southern Hemispheres suggests to me that one of the various periodicities in climate may be at work, but that’s just a wild guess on my part.

The temptation to use weather events to flog pet theories about climate is dishonest an annoying in the extreme–regardless of who does it, be they skeptics jumping up and down about a cold winter or alarmists howling about a hot summer.  The Jeremiah-esque ideologue and proselytizer James Hanson got the global warming hysteria ball rolling by saying that the US heatwave and drought of 1988 was a harbinger of doom–when it was most likely something quite similar to what happened in Russia this summer.  Their cause flagging politically, the alarmists are trying to do the same with the Russian heat wave.  It is not honest to do so–and it is not science.

It is possible that there are complex interactions and mechanisms by which temperature trends forced by GHGs can lead to increased frequencies and intensities of heatwaves and droughts.  But none have been described or tested.  The initial empirical evidence, per NOAA, that there appears to be no trend in the frequency of blocking events is inconsistent with this.  Moreover, as Leroux notes, atmospheric pressure and the frequency of MPHs both began to trend up well before GHGs did.  So what caused that pressure trend?  GHGs couldn’t have.

Thus, the Russian heatwave should be a reason to acknowledge that we do not fully understand–or even remotely understand–the drivers of temperature extremes in particular, or climate generally.  It should be a spur to inquiry and research, not an opportunity to advance predetermined agendas.

NOAA is to be commended for taking an objective approach to the subject.  Sadly, too few others–including far too many scientists–have not.  Rather than a centerpiece of a morality play about global warming, events like the Russian heat wave should be viewed as things that are anomalies (or at least, lacunae) in the received climate models.  Such anomalies/lacunae should lead to questioning the received models, and the posing and testing of others.  That’s how science should work.  Whether today’s politicized climate science will work that way is, sad to say, highly doubtful.

At first blush, the full throated defense of Islam generally, and the Ground Zero Mosque specifically, by the progressive left is passing strange.  Given that the battle over the GZ Mosque is centered in New York, the leftist precincts of that city, notably the Upper West Side, hard by the Hudson, are particularly strident in their attacks on the mosque’s critics.

The progressive argument is couched in terms of religious tolerance, opposition to religious bigotry, and the importance of property rights.  But the progressive left has long been extremely antagonistic to the believers of other religions, especially evangelical Christians, traditional Catholics and Jews, and Mormons.  The antagonism often clearly degenerates into outright bigotry, which seldom brings a peep of protest from other progressives.  Ridicule, mockery, and insult are routine.

And progressives are stalwart defenders of property rights?  Who knew?

Moreover, many of the beliefs and behaviors shared by large numbers of Muslims, especially about women and homosexuality, are antithetical to strong progressive views.  Indeed, many progressive attacks against the adherents of non-Muslim denominations emphasize their benighted views on women and gays, even though those views are benign compared to those common in the Muslim world.

In this regard, it is particularly illuminating to note that the Reagan administration made common cause with Saudi Arabia and other reactionary Muslim states to oppose United Nations initiatives on reproductive matters (read: abortion) and women’s and gay rights that were the pet causes of the transnational progressive left.  Progressives were scathing in their criticism of Reagan for this alliance.

So any intellectually consistent and honest progressive would have to admit that the strange new respect for Islam is contradictory, and indeed, hypocritical.

What explains it then?  I think the answer is straightforward.  The progressive left is defined in the United States by its opposition to the beliefs of the majority of other Americans.  The progressive left detests the idea of American exceptionalism.  Most Americans are American exceptionalists.  Funny thing, that.  The progressive left believes that the United States is a deformed and malign nation, an oppressor.  (Don’t believe they believe that?  Read Howard Zin sometime, or the encomiums to him.  Or the recent cringe-making State Department report to the UN Human Rights Counsel.)  Most Americans admit to the nation’s flaws, but believe that it is truly the last, best hope of mankind, whose contributions to human freedom and dignity–and yes, progress–far outstrip its failings.  Most progressives identify themselves as elite who are intellectually and morally superior to the great unwashed, especially those living away from the coasts.

So, if the vast majority of those whom the progressive left loathes are offended by the thought of a mosque headed by an imam of troublingly ambiguous views being located so close to Ground Zero, as surely as night follows day, the progressives will rise in defense of the mosque and the imam.  All the more because said imam has expressed critiques of American policy and actions that sound eerily like those that are staples of the left’s bill of indictment against the US.  And American exceptionalism is an anathema to Islam as well.  The endless Muslim complaints–whines, really–about the transgressions of the West generally, and the US in particular, resonate loudly with progressives.  In this regard, progressives and Muslims–even the most reactionary of them–have a meeting of the minds.

In brief, the left’s alliance with Islam on the matter of the GZM and other matters, is purely an opportunistic one, and completely unprincipled.*  They share a common opponent.  A common enemy.  And it is us.  On virtually every other issue, they have nothing in common, and indeed hold completely contrary views.  But progressives have no problem putting those differences aside in order to use the mosque issue as another front in their continuing war against a mainstream American that remains stubbornly wedded to the belief that America is a pretty good country, damn it.

And I say go for it!  The left is wallowing in its self-righteousness, self-anointed moral superiority, and disdain for vast swathes of the American public: if you doubt that, just take a gander at Bloomberg’s speech (but only if you have a very strong stomach).  Hardly the recipe for political success in a country where such views are held by a decided minority.  What’s more, this particular issue stirs such intense passions among so many people.  Indeed, there are few other issues on which progressive lectures are likely to engender such an intense backlash.

So go right ahead.  Keep poking the big dog with a stick.  You all and Imam Rauf can have one big pity party when the big dog wakes up and does what big dogs do, when poked with a stick.

* And don’t even get me started on the sudden solicitude on the left for General Petraeus and the troops in Afghanistan and Iraq.   As if the Taliban and Al Qaeda et al don’t have more than enough things that they hate about us that one more will make a difference.  After all, depriving them of “reasons to fight us” would require adoption of shariah and submission to the caliphate.  Is that what Bloomberg and Frank Rich and others that have raised this argument are proposing?; it is certainly the logical implication of their argument.  What a strategy!   Win a war by acceding to the enemy’s demands.  And where were these people when many of their political allies (and funders) were calling Patraeus “General Betray-us”?

FT Alphaville summarizes the Troika Dialog argument touting Russia as the BRIC to bet on.  According to TD:

Russia has more raw materials, a more educated and middle-class population, a strong macroeconomic framework, a better track record, more resilience to global warming, and is cheaper. Moreover, it has unique commodity assets and a clear and successful European path to follow.

Color me extremely unimpressed.  If this is the best case, Russia’s future is bleaker than I thought.

1. Raw materials are a curse to growth and long term economic prospects, not a benefit.  That has been particularly true in Russia’s case, but it is difficult to find raw material intensive economies that have been stalwart growth performers.  It’s a lot easier to find such economies that are basket cases.

2. Yes, Russia has a more educated populace than other BRICs.  But that is already reflected in the higher per capita income of Russia compared the other BRICs (another attribute that TD touts).  Moreover, as is true of much of Russian capital, the educational prowess–the human capital–of the Russian population is pretty much a Soviet legacy that is depreciating rapidly.  The current Russian educational system is pretty much a disaster, and a shadow of the Soviet system.  Corruption is rife: today, Russian educators put the cheat in учитель.  The future of Russian education is hardly encouraging.

3. TD vastly understates Russia’s crippling economic defects:

Apart from oil price dependency, which is an aspect of macroeconomic fragility, Russia’s weaknesses are poor corporate governance, which restricts the returns to minority shareholders, and regulation, which restricts ROE levels (e.g. utilities). We reject the fashionable view that other issues like weak population growth, poor infrastructure, or poor government are necessarily damaging to ROE levels.

Poor corporate governance is the understatement of the century.  FTAlphaville has a more complete list:

It ranks worst for corruption, corporate governance, and most institutions in international rankings. In financial services – such as investor protection, ethical behaviour of companies, strength of auditing, and market sophistication – again it fall short of the other Brics, according to the World Economic Forum. And it ranks second worst on the business cost of terrorism (behind India), and both violent crime and organised crime (to Brazil).

But even that list is seriously incomplete.  A more complete list would include: the absence of reliable property rights, the lack of contract enforceability, the corruption of the legal system and the absence of the rule of law, the constant threat of expropriation, the arbitrariness of government.  I could go on.

In brief, the TD analysts are being pretty thick.

Timothy Garten Ash had a more reasonable assessment a couple of months back, but it still focuses on traditional macro and structural issues and underemphasizes Russia’s fundamental problem: its institutional deficit.

These are all issues that primarily speak to Russia’s long term prospects.  Its second quarter growth numbers came out, and they show things aren’t doing all that well in the short run either.  Russian GDP grew 2.5 percent year-on-year from July, 2009 to July, 2010.  The economy actually declined month-on-month.  Although the fires certainly contributed to this decline, it is not a a favorable sign.

This is anemic even by comparison to the US.  From trough (2Q 2009) to the present (hopefully not the peak, though it might be a local one given the real prospects for a double dip), the United States grew 3.1 percent.  This was after a 4.2 percent decline from the peak in 4Q 2007 to the bottom in 2Q 2009.

In comparison, the Russian economy declined 7.9 percent in 2009, about twice the US decline.  Twice the decline and a smaller rebound is hardly stellar performance, especially since the standard of comparison–the US–has not been a stellar performer itself.

Things are even worse if evaluated on an output gap basis.  Given that Russia was growing at 5+ percent into mid-2008, the output gap is now about 15.5 percent.  Since the US was growing at about 2.5 percent, the gap her is around 5.5 percent.

The sluggish growth in Russian GDP is particularly underwhelming given that oil prices have more than doubled off their crisis lows.  This should have given Russia a favorable jolt, while serving as drag on the US.

The Finance Ministry is sticking by its forecast of 4 percent growth in 2010.  Highly unlikely, especially given the effects of the drought; the fires; and the serious prospect for a global slowdown in the last third of the year.

Short run or long run: neither looks too hot.