Streetwise Professor

January 20, 2017

Who is the Reactionary on Nato and the EU? Not Trump

Filed under: History,Military,Politics,Russia — The Professor @ 7:31 pm

So it’s official. Donald John Trump is now president of the United States. Buckle in. It will be a wild ride.

One reason it will be wild is that Trump has much contempt for the status quo, and shows no hesitation in saying so. He gave a taste of things to come in an interview last week. He questioned the viability of the EU, saying that it disproportionately benefited German at the expense of other countries. He also called Nato obsolete.

The reaction was immediate and hysterical. Was this warranted?

Not in my view.

Take Germany. Trump was making an observation. It is an opinion shared by large numbers of Europeans, especially in the south. It is a reasonable observation. And that’s probably why the Europhiles are freaking out: they know that the EU is under great strain and that its popular support is thin and wavering, and would prefer that everybody Believe! Believe! so Euro-Tinker Bell lives.

But what about dissing Germany, our stalwart ally? First, anti-American sentiment is very strong in Germany, and is often expressed by government officials. Second, the German government has often made unfavorable comments about American policy.  If you can’t take it, don’t dish it out.

Given all the frenzy about Trump’s alleged affinity for Russia and threat it poses to the west and western solidarity, let’s remember that there are very strong pro-Russian elements in Germany. Especially in the business community. Germany, don’t forget, is the country of “Putin Verstehers”–Putin understanders. It’s ex-chancellor is on the board of a Gazprom subsidiary, and Germany has actively supported Nord Stream against the objections of neighboring EU countries. Putin can only dream that Trump will be as accommodating to Russia as Germany has been. So don’t put the onus on Trump for compromising western interests in dealing with Russia. Merkel’s worries about that are far closer to home, as in her coalition partners, notably her Foreign Minister.

Insofar as Nato is concerned, it is obsolete, in the sense that it has not updated its mission, strategy, or capabilities in response to dramatic changes that have occurred in the last 25 years, let alone the nearly 70 years since its founding. Indeed, it is arguable that Nato is not just obsolete, but dysfunctional.

Nato countries spend piteously small amounts on defense, and the capability that they get is not worth what little they do spend. Germany spends around 1 percent of GDP on defense. There have been times recently that German troops had to train with broomsticks. Recently 2/3s of its combat aircraft were inoperable. It has zero capability to deploy anything overseas. The Dutch have no tanks. I could go on. Suffice it to say that Europe does not put its money where its mouth is when it comes to Nato. They pay lip service, rather than for troops and weapons. I would take their pieties about Nato more seriously if they actually sacrificed anything for it.

(By the way, this is why Russian hyperventilating about the Nato threat is absurd. It poses no military threat, beyond that which the US poses unilaterally. Indeed, for reasons that I discuss below, the European Nato Lilliputians tie down the American Gulliver.)

Another example of dysfunction is Montenegro’s impending bid to join Nato. Just what is the rationale for this? There is none: Montenegro brings no military capability, but just adds an additional obligation.

But it’s worse than than. Nato’s biggest weakness is its governance structure, which requires unanimity and consensus in major decisions. This is flagrantly at odds with one of the principles of war–unity of command–and makes Nato decision making cumbersome and driven by the least common denominator. Nato’s governance, in other words, makes it all too easy for an adversary to get inside its decision loop.

Coalitions are always militarily problematic: Napoleon allegedly rejoiced at the news that another nation had joined one of the coalitions against him. Nato’s everybody gets a vote and a trophy philosophy aggravates the inherent problems in military coalitions.

Put differently, decision making power in Nato bears no relationship to contribution and capability. This is a recipe for dysfunction.

So what is the point of adding yet another non-contributor (population 620K!) whose consent is required to undertake anything of importance? This is madness.

It is especially insane when one considers that Montenegro is a Slavic country with longstanding ties to Russia, and in which Russia has a paternalistic interest. Parliamentary elections last year were extremely contentious, with the pro-western incumbents barely hanging on. Post-election, there were allegations of an attempted coup engineered by the Russians. The country is extraordinarily corrupt. All of which means that if you are concerned about Russia undermining Nato, Montenegro is the last country you would want to admit. It is vulnerable to being suborned by Russia. Outside of Nato-who cares what Russia does there? Inside of Nato-that is a serious concern, especially given the nature of Nato governance.

But apparently current Nato members believe that it would be really cool to collect the entire set of European countries: frankly, I can think of no other justification. There is no better illustration of how Nato has lost its way, its strategic purpose, and its ability to think critically.

So yes, Trump is more than justified in raising doubts about Nato, and if questioning the relevance of the organization is what is needed for people to get serious about it and to reform it to meet current realities, then he’s done a service.

Following the shrieking and moaning on Twitter today during the inauguration, it struck me that the most prevalent theme was that Trump is turning his back on X years of US policy in this, that, and the other thing. The reaction shows that the real conservatives–in the literal, traditional sense of the word meaning unflinching defenders of the old order and status quo–are on the leftist/statist side of the political spectrum. They are petrified at the thought of disturbing in the least way the existing order. To them, it is apostasy even to question this order. Trump is challenging all their verities, and it drives them to apoplexy.

The EU and Nato are two examples of institutions that are supposedly sacrosanct, but which Trump has had the temerity to question. The defense by the real conservatives–the real reactionaries, actually–on the left and left-center has been unthinking and reflexive. They refuse to acknowledge the rot and decay that exists, and which threatens the viability of the things they claim to admire. Rather than neurotically projecting their fears on Trump, they should thank him for giving them the opportunity to reform dysfunctional bodies, and join in the work of reforming them. Not that I expect that they will, because this is not in the nature of conservatives and reactionaries.

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January 17, 2017

Didn’t Know China is a Beacon of Economic Openness & Political Freedom? You’re Not Worthy of Davos!

Filed under: China,Climate Change,Economics,Politics — The Professor @ 9:26 pm

The Davos set is in such a complete meltdown over Trump that they are desperate for someone to champion the cause of globalism and to fight against the growing tide of protectionism. And they found him! Chinese President Xi Jinping.

No. Really. The slobbering over his speech today praising globalization and criticizing protectionism was embarrassing, even by Davos standards.

Trump’s views on trade are utterly misguided, but to view Xi and China as some sort of avatar for an open society is not just bizarre. It’s perverse. Beyond perverse, really.

China’s economy is a Frankenstein of controls and state intervention. Vast swathes of the Chinese economy are strongly protected from foreign competition, and foreign investment is heavily regulated. The currency is also tightly controlled, and not freely convertible: that will happen in a decade, if ever. I am not saying that that the currency is currently manipulated downwards. To the contrary, at present the reverse is true. Chinese are looking for every way possible to get money out of the country, a sure sign of an overvalued currency. (Small illustration: visit a luxury car dealer in any major city in the US, and you’ll note how many of the buyers are Chinese.) The government  is doing everything possible to prevent it, and may be forced to go to hard capital controls. The point is that in the currency as in other things, the Chinese buy open markets a la carte, and only when it pleases them.

In brief, China is a heavily controlled mercantilist economy. Xi and the Chinese do things that Trump could only dream of in his greatest flights of mercantilist fantasy. To view Xi as the anti-Trump is utterly ridiculous, even by the clownish standards of the Davos dips.

Trump’s presidency and the environmental holocaust that it will supposedly bring has also led many to turn to China for leadership on climate. This is just as clueless, even if one overlooks the real pollution that chokes China–already this year, 60 Chinese cities have declared smog emergencies–and focuses on the far more speculative issue of CO2.

Yes, China has spent gazillions on wind and solar. But what has it received for its massive investment? This NYT article gives a great illustration:

On the edge of the Gobi Desert, the Jiuquan Wind Power Base stands as a symbol of China’s quest to dominate the world’s renewable energy market. With more than 7,000 turbines arranged in rows that stretch along the sandy horizon, it is one of the world’s largest wind farms, capable of generating enough electricity to power a small country.

But these days, the windmills loom like scarecrows, idle and inert. The wind howls outside, but many turbines in Jiuquan, a city of vast deserts and farms in the northwest province of Gansu, have been shut off because of weak demand. Workers while away the hours calculating how much power the turbines could have generated if there were more buyers, and wondering if and when they will ever make a profit.

“There’s not much we can do right now,” said Zhou Shenggang, a manager at a state-owned energy company who oversees 134 turbines here; about 60 percent of their capacity goes unused each year. “Only the state can intervene.”

China, the world’s largest emitter of greenhouse gases, has pointed to its embrace of wind and solar power and other alternatives to coal to position itself at the forefront of the global effort to combat climate change.

More than 92,000 wind turbines have been built across the country, capable of generating 145 gigawatts of electricity, nearly double the capacity of wind farms in the United States. One out of every three turbines in the world is now in China, and the government is adding them at a rate of more than one per hour.

But some of its most ambitious wind projects are underused. Many are grappling with a nationwide economic slowdown that has dampened demand for electricity. Others are stymied by persistent favoritism toward the coal industry by local officials and a dearth of transmission lines to carry electricity from rural areas in the north and west to China’s fastest-growing cities.

Then there’s this: “Wind power now accounts for 3.3 percent of electricity generation in China.”

And so how does China generate power? With dirty coal, mainly–as the choking smog in Beijing and other major cities testifies.

In brief, China’s renewables boom is a classic example of green hype, and of the grotesque malinvestment that has occurred in China in the past decades, especially post-financial crisis. Keep this in mind when you interpret Chinese economic statistics. These thousands of windmills that produce nothing contributed to measured Chinese GDP–but they contribute virtually nothing to its actual economic wealth or consumption. Much of measured Chinese GDP growth is due to the incurring of costs that confer no benefits, and is as economically meaningful as Soviet statistics. (Alas, allegedly smart people are as deceived today by China as they were by the supposed Soviet miracle.)

The article also contains this tidbit: “The tepid demand for electricity in an economic downturn has also exacerbated the troubles for renewable energy. Demand for electricity grew by only 0.5 percent in 2015, the slowest rate of growth since 1974.” But measured GDP increased 6.9 percent. It’s hard to reconcile those figures.

But the “elite” is so obsessed with Trump and the havoc that they are just sure he will wreak on trade and the environment that they embrace the leader of a mercantilist environmental disaster as their savior.

And it’s not just economics. The elites project every conceivable oppression fantasy on Trump, and portray him as a mortal threat to racial and religious minorities (including Jews–quick: Someone warn his son-in-law!), LGBTQXYZwhateveritisnowIcan’tkeepupandwillprobablyrunoutofletters, immigrants, and on and on and on. Yet they are lionizing a real oppressor, indeed, the leader of one of the most repressive regimes on the planet: what it lacks in rigor compared to North Korea, it makes up with in size. They ignore real oppression and get hysterical over oppression that exists exclusively in their imaginations.

I would say these people are not serious. I wish that were true. The problem is that these people are deadly serious.

They are also completely without a clue. Davos founder Klaus Schwab ostentatiously said that Trump was not invited. First, as if Trump gives a flyer–indeed, he probably considers this a compliment. Second, and more importantly, it demonstrates exactly why this lot was utterly blindsided by the events of 2016–most notably by Brexit and the election of Trump. Davos–and elite conversation around the world–is a carnival of confirmation bias, an impenetrable bubble of self-congratulation utterly cut off from the people they condescendingly claim that they want to help. People with way too much money and way too little sense.

At the risk of sounding like Tom Friedman quoting some cab driver, I will relate a story from today that illustrates the disconnect between those in Davos giving tongue baths to a mercantilist leader of a police state and the people who are toppling their heroes and putting their arch enemies in their stead. While getting a haircut, my barber–a Lebanese immigrant, by the way, not a member of Storm Front–said “I don’t pay much attention to politics, but I hope Trump tells the Chinese to go fuck themselves.” (Note: China had not been part of the conversation up to that point.)

But this is our world now. Due to the Trump derangement syndrome the allegedly liberal globalist elites heap praises on the leader of a protectionist, mercantilist, serial human rights violator. And all the while ignoring those with more common sense (like my barber), then wondering why they are losing.

 

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January 13, 2017

Who? Whom?

Filed under: Military,Politics — The Professor @ 9:05 pm

That, of course, is Lenin’s famous question.  What brings it to mind today is the drumbeat from the political class that Trump has to play nice with the intelligence services. For instance, Leon Panetta has been spending the last week chiding Trump for his rift with the intelligence community. Panetta represents the default DC position, which is aghast that that meanie Donald is bullying their BFF, the CIA.

Even worse is Chuckie Schumer: “Let me tell you, you take on the intelligence community, they have SIX ways from Sunday at GETTING BACK AT YOU”.

Nice little presidency you got here. Shame if anything happened to it.

Um, don’t you think that the appropriate action by a responsible government official would be to say that it is unacceptable for “the intelligence community” to “GET BACK AT” the president of the United States? Oh, but I was talking about Chuckie Schumer, so “responsible government official” doesn’t quite fit, does it?

And by the way, can you imagine the sh*tstorm that would erupt if anyone had said this, approvingly, about the “intelligence community” taking down Barack Obama a few pegs?

Well, I’ve always known it takes two to tussle, so why put all the blame on Trump? And more to the point, these same people pull their chins obsessively, and worry about Trump’s anti-constitutional impulses (a worry notably missing during the pen-and-a-phone Obama administration), Mattis’ appointment threatening civilian control of the military, and such.

Well riddle me this: who works for whom? Does Donald Trump work for the CIA, or does the CIA work for the chief executive of the United States under the Constitution, Donald Trump? Reading the New York Times, the Washington Post, and other establishment media outlets, I’d have to conclude the former.

The CIA, DNI, FBI, and the rest of the “seventeen intelligence agencies” we’ve been told about ad nauseum are part of the executive branch, and are answerable to the duly elected chief executive. Which in 7 days will be Donald John Trump. They may not like it, but they have to lump it. That’s the way the system works. Or is supposed to, anyways-as they tell us when it suits their purpose.

And if you are really truly concerned about seizures of power you should be concerned about the plain-as-the-nose-on-Barabara Streisand’s-face campaign of the intelligence agencies to de-legitimize the Trump presidency.

But apparently some people–and apparently most people in the 202 area code–are unable to rise above their oh-so-situational principles. A CIA doing things that would have had them in the streets had they done it against Obama or Clinton is just hunky dory if directed against Trump. Indeed, Trump is in the wrong for having the temerity to fight back.

Epitomizing the CIA courtier class is WaPoo columnist David Ignatius. I would call him a pilot fish, but those creatures clean the gills and mouth of sharks: Ignatius is more like whatever cleans the other end of the digestive tract.

His chin puller today included this attack on one of the CIA’s bêtes noire, National Security Advisor designate Michael Flynn:

Retired Lt. Gen. Michael T. Flynn, Trump’s choice for national security adviser, cultivates close Russian contacts. He has appeared on Russia Today and received a speaking fee from the cable network, which was described in last week’s unclassified intelligence briefing on Russian hacking as “the Kremlin’s principal international propaganda outlet.”

According to a senior U.S. government official, Flynn phoned Russian Ambassador Sergey Kislyak several times on Dec. 29, the day the Obama administration announced the expulsion of 35 Russian officials as well as other measures in retaliation for the hacking. What did Flynn say, and did it undercut the U.S. sanctions? The Logan Act (though never enforced) bars U.S. citizens from correspondence intending to influence a foreign government about “disputes” with the United States. Was its spirit violated? The Trump campaign didn’t immediately respond to a request for comment.

If the Trump team’s contacts helped discourage the Russians from a counter-retaliation, maybe that’s a good thing. But we ought to know the facts.

First, to claim that Flynn’s appearances on RT demonstrate his Putinist bona fides, without even mentioning Flynn’s very harsh condemnation of Russia in his book and in public statements about it means that Ignatius has discarded even the pretense of objectivity or fairness.

Second, this story starts in the middle. The Logan Act? Give me an effing break. At the time of these conversations, Flynn was 3 weeks from becoming NSA–hardly an ordinary citizen engaged in ad hoc diplomacy. Obama had just maliciously and deliberately complicated the incoming administration’s dealings with Russia by imposing sanctions on his way out the door. Everybody with a lick of sense realized that this was Obama’s purpose. But Ignatius doesn’t mention that. Get this, especially in light of the current screeches about Trump not being appropriately deferential to the CIA:

What discussions has the Trump team had with Russian officials about future relations? Trump said Wednesday that his relationship with President Vladimir Putin is “an asset, not a liability.” Fair enough, but until he’s president, Trump needs to let Obama manage U.S.-Russia policy.

The president is president, damn it, unless his name is Trump.

So what is the incoming administration generally, and Flynn specifically, supposed to do? Sit on their hands and zip their lips for 22 days rather than try to manage a problem that Obama deliberately created for them?

Can you seriously believe that had the situation been reversed, that Ignatius would have arrived at the same judgment? (A word I use loosely in this context.)

Other defenders of the CIA react to Trump with outrage: How dare he attack those who risk their lives defending us?!?!? First, the operational element of the CIA that actually faces any prospect of mortal danger is rounding error in its personnel count. The vast majority sit all day long in front of a computer screen in a huge building, and the biggest risks they face are sciatica, paper cuts, and bureaucratic backstabbing. Second, when I look at Syria, and other misadventures of the CIA where CIA lives have been at risk, I have to say: don’t do me any more favors by defending me.

Chuckie Schumer is right as a description of reality: the intelligence agencies DO have six ways to Sunday to attack a president (and they are doing so to the president elect now). But that’s exactly why Chuckie Schumer, and all the others toadying up to the CIA et al are dead wrong. This is not something to be remarked upon as a mere empirical fact, without moral judgment. It poses far more of a threat to constitutional government than Donald Trump’s Twitter account, or even any potential power grabs as president–which will elicit a furious reaction if he tries. Yet the Chuckie Schumers (which my autospell changed to “Chuckie Schemers”–smart autospell!) and Leon Panettas and David Ignatiuses of the world are clearly taking the side of the entity that is subverting the constitutional order. They realize that elections have consequences, and they don’t like it one damned bit, so they side with the unelected. Mark that well, and remember it any time they wail about Trump’s violation of the constitutional order of this country.

 

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Dossiergate: The Rogue Intelligence Operation Here Is Not Russian

Filed under: Politics,Russia — The Professor @ 7:36 pm

It pains me to do it, but I feel compelled to comment on the Trump dossier. I will not call it the “intelligence dossier” because it is the antithesis of that. It is a retard dossier, but the retarded has become a political reality. And because the story of its release has very troubling implications.

I will just try to focus on a few high level points.

First, the document’s credibility is undermined by its narrative voice, which is best described as third person omniscient. This is is often reserved for bad fiction written by amateurish writers, which is the case here. There is no way that any private intelligence operative, ex-MI6 or not, would have so many sources who knew so many important people who were present when said important people had conversations about extremely sensitive–and indeed explosive–topics.

Second, even overlooking that, the chain of transmission of each story is rather long. A source observes the principals (e.g., Putin and Ivanov) having a conversation; tells that to a (presumably) Russian contact of Christopher (not Remington!) Steele; who tells Steele who then transcribes it and passes it along. Even in a game of telephone with honest players there is an appreciable opportunity that the story will become garbled along the way, especially since at least one translation was likely involved for each story. And why should we possibly believe any one of the participants in these chains, each of whom had incentives to lie and embellish? Consider Steele’s (presumably Russian) intermediaries. They were no doubt paid, and their income was dependent on the putative salience of their information. Passing along “I had lunch with Ivanov’s chief of staff. He had borscht” wouldn’t command a very high price, would it? Dishing dirt about Ivanov conversations with Putin would be much more valuable. And who could verify the stories? Who could even cross check basic facts? So spice it up!

Especially when it appears that the buyer of the information (both at the first stage, Steele, and his downstream political customers) hardly seems to be skeptical, and has a definite desire for the lurid, the incentives of the intermediaries to make stuff up are strong indeed. Not to mention the fact that the alleged sources (if they exist) have an incentive to tell the stories they want heard.

In other words, this type of communication is inherently unreliable. The incentives to fabricate are strong, and the penalties for fabrication are negligible.

Third, some of the stories are real clangers. I’ll focus on two.

The first story claims that in 2015 Sechin told Carter Page, an alleged Trump emissary, that if Trump would lift sanctions, Sechin would sell Trump the 19.5 percent share of Rosneft to be privatized. Look, I think Sechin can be a moron, but there’s no way he could possibly think that would work. Just how would Trump hide the acquisition of such a large asset? How would he pay for it? How would he possibly deal with the political maelstrom that this acquisition would cause? Maybe Sechin envisioned a Russian-style (or Mafia-style) acquisition, in which a straw buyer would take ownership, but Trump would be the economic beneficiary. But even that would be wildly unworkable.

The second story–stories actually–relate to Sergei Ivanov, Putin’s now ex-chief of staff. A note about Ivanov. He is a scary guy. A real Chekist, who served in the KGB, SVR, and KGB. He was reputed to be a Chekist’s Chekist. He is the kind of guy about whom you could say (and about whom I did say): “Be careful what you ask for if you desire getting rid of Putin. Somebody like Ivanov could take his place.” And he is exactly the kind of guy you would expect not to be blabbing about things said in confidence to Putin, or with anyone else.

In the dossier, several conversations between Ivanov and Putin are described. In one set, Ivanov is harshly critical of the attempts to influence the US election. On July 30, the dossier claims that the Kremlin is concerned that the operation is spinning out of control. On 5 August, Ivanov allegedly (I will drop the “allegedly” hereafter) tells a confident who tells Steele’s source that he is angry at the turn of events, and blames Peskov for screwing things up. Pesky is “scared shitless” that the operation is resulting in huge blowback, and that he will be blamed. Ivanov claims to have opposed the operation from the beginning, and claims Medvedev does too.

Five days later (!), Ivanov claims that Putin is “generally satisfied with the progress of the operation to date.” So pleased, in fact, that he has a drink with Ivanov to celebrate!

I’ll pause here for a second, to give you the opportunity to test your knowledge about Putin. See the problem with this story?

Yes: Putin is a teetotaler. Maybe it was just Ivanov drinking, but this detail hits a very false note.

But even overlooking that, according to the dossier, in 5 days the Kremlin goes from being “scared shitless” about the blowback, to being generally satisfied.

But wait! Two days after Putin and Ivanov were toasting the success of the influence operation, Ivanov is fired unceremoniously–and shockingly. The next month, the dossier claims that Ivanov was fired because he had given Putin “poor advice” on the operation. Whereas the earlier telling in the dossier portrays Ivanov as an opponent of the operation, by mid-September the dossier claims that Ivanov (and the SVR!) had advised Putin that the operation “would be effective an plausibly deniable with little blowback.” The blowback was so severe that Putin ordered everyone to dummy up, and deny, deny, deny.

August 10th (or thereabouts)–“Серге́й, Давайте выпьем за успех нашего дела!” August 12th, Putin does his Donald Trump imitation: “вы уволены!”

Maybe there is a way of squaring all this, but I don’t see it. Is he [Ivanov] a supporter of the deal, or ain’t he? Was he afraid of blowback from Peskov’s stupidity, or was he convinced there would be no blowback? Was Putin bipolar, and serially displeased, pleased, displeased, pleased?

One possibility is that Ivanov was changing his story in response to shifting political winds in the Kremlin. But if that’s so, every other source could have been doing so as well. And recognizing that, no statement in the entire freaking dossier can be taken at face value. Instead, even if the statements were made (a big if), they were all self-serving tales told to advance the tellers’ interests.

I am not the only one to call BS on all this. My colleague, Paul Gregory, does so as well, and he has much deeper experience in Russia, including long work in Soviet archives (including some intelligence documents). He too ridicules the Sechin offer, though I don’t think (as Paul does) that Sechin was offering the stake for free.

Paul’s conclusion is that the document was written by a Russian, probably with background from the security services.

Wrap your head around the possibilities inherent in that, especially when you consider the twisted ways that spies think. Given the impact the document has had, and assuming that this impact was anticipated by those who prepared it (or at least, provided the stories that Steele typed up), and the “Putin hacked the election to help Trump” is not the only hypothesis in the running. Please submit your hypotheses in the comments.

One last point. As I mentioned in response to a comment by elmer earlier today, the way this document came to light is very disturbing and casts a very ominous light on the US intelligence agencies. This document, by multiple tellings, has been circulating for some time. Harry Reid referred to it in a letter to the FBI (or at least, that’s obvious in retrospect). Multiple journalists have admitted that they had seen it. No media organization would report it, however, because it was so clearly unsubstantiated, and incapable of being substantiated.

But lo and behold, the dossier is allegedly mentioned in an intelligence briefing given to Trump. “Trump told about possible kompromat” is a legit story, right? And that makes the source of the claim that US intelligence forwarded to Trump a legitimate story, right? So soon after the story about the briefing hits, Bottom Feeder–excuse me, Buzz Feed–publishes it.

In other words, a necessary condition for the release was that the intelligence community tells Trump about it. In the public interest, of course. (And in the event, it was a sufficient condition as well.)

Spare me. This document had been around more than a crack whore, so of course Trump knew of its existence. He didn’t need some anal retentive type from Langley to tell him about it. The briefing served no public purpose. But it did serve the purpose of green lighting the release of the document.

It could be that the CIA/FBI/DNI etc. knew what the media’s Pavlovian response would be to the LEAK about the briefing, and didn’t need to collude with CNN or whomever to ensure that things would play out as they did. Or perhaps the intelligence community did collude with some in the media. That’s of secondary importance. What is of primary importance is that the intelligence agencies–with the assistance along the way of John McCain–most likely deliberately schemed to ensure the publication of this document days before Trump’s inauguration.  A document that they had to know was full of falsehoods, and likely a falsehood in its entirety. (If they didn’t know, we are just screwed in a different way, being served by asses instead of demons.) And a document that was sure to have explosive political consequences.

In other words, there is a rogue intelligence operation here, and it isn’t Russian.

This is beyond the pale, and bodes very ill for the coming months.

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January 6, 2017

Send in the Clowns: The “Intelligence Community’s” Wikipedia Page on Russian Attempts to Influence the 2016 Election

Filed under: History,Politics,Russia — The Professor @ 9:30 pm

The “intelligence community’s” serial effort to beclown and degrade itself reached a new low today with the release of the much touted report that we were breathlessly told would prove that Russia (a) hacked the DNC and Podesta, (b) provided this information to Wikileaks, and (c) did so with the specific intent of securing a Trump victory (or, a Hillary defeat). It did none of these things. If anything, this report was less substantive than the one that was previously released.

As an indication that even the IC is hardly proud of this effort, the report was released exactly at the time you would do so with the intent of burying it: late in the afternoon of a Friday. Apparently even the FBI, CIA, DNI, etc., are ashamed for prostituting themselves to Hillary, the DNC, and the lame duck administration.

One thing that had been promised–by leaks, of course–that the report did not deliver was the identity of the party who delivered the DNC and Podesta emails to Wikileaks:

US intelligence has identified the go-betweens the Russians used to provide stolen emails to WikiLeaks, according to US officials familiar with the classified intelligence report that was presented to President Barack Obama on Thursday.

So why didn’t the public report name names? And don’t tell me that the IC is loath to disclose such information for fear that it would compromise precious methods and sources. In the past, the government has determined that a hacking offense was so egregious that naming and shaming–and indeed indicting–was necessary. In 2014, the government indicted Chinese military personnel that it alleged had hacked private US corporations. It took this measure precisely because it believed that this was necessary to deter future such acts:

“This is a case alleging economic espionage by members of the Chinese military and represents the first ever charges against a state actor for this type of hacking,” U.S. Attorney General Eric Holder said.  “The range of trade secrets and other sensitive business information stolen in this case is significant and demands an aggressive response.  Success in the global market place should be based solely on a company’s ability to innovate and compete, not on a sponsor government’s ability to spy and steal business secrets.  This Administration will not tolerate actions by any nation that seeks to illegally sabotage American companies and undermine the integrity of fair competition in the operation of the free market.”

“For too long, the Chinese government has blatantly sought to use cyber espionage to obtain economic advantage for its state-owned industries,” said FBI Director James B. Comey.  “The indictment announced today is an important step.  But there are many more victims, and there is much more to be done.  With our unique criminal and national security authorities, we will continue to use all legal tools at our disposal to counter cyber espionage from all sources.”

“State actors engaged in cyber espionage for economic advantage are not immune from the law just because they hack under the shadow of their country’s flag,” said John Carlin, Assistant Attorney General for National Security.  “Cyber theft is real theft and we will hold state sponsored cyber thieves accountable as we would any other transnational criminal organization that steals our goods and breaks our laws.”

“This 21st century burglary has to stop,” said David Hickton, U.S. Attorney for the Western District of Pennsylvania.  “This prosecution vindicates hard working men and women in Western Pennsylvania and around the world who play by the rules and deserve a fair shot and a level playing field.”

The administration has represented that what transpired in 2016 was far worse than what the Chinese did. So why no indictment? Why no names? The double standard here is flagrant.

It gets better. Earlier this year the US indicted two Russians, and the FBI admitted it had reverse hacked into Russian computers. Or better yet, it indicted seven Iranians allegedly members of the Iranian Revolutionary Guard Corps in March. At the time, Reuters characterized this as part of an administration policy to confront publicly foreign state hackers. And check out what our soon-to-be-erstwhile Attorney General said at the time:

“An important part of our cyber security practice is to identify the actors and to attribute them publicly when we can,” Lynch said Thursday. “We do this so that they know they cannot hide.”

“An important part of your cyber security practice is to identify the actors and to attribute them publicly when we can.” That was then, this is now, apparently.

As for what is in the report, well, there is nothing, really. There are five pages of ex cathedra assertions of “assessments” that Russia intervened in the election with the intent of aiding Trump/hurting Hillary. These are mere appeals to authority, with zero–literally no–supporting factual evidence. (And even these appeals to authority are hedged with caveats that intelligence judgments can be wrong. Believe us. We know.)

At times the report descends to farce. It cites the fact that Russian information/propaganda outlets attacked Hillary and appealed to the Trump constituency as evidence of Russian intent to sway the election. But it also states that Russian reticence in explicitly supporting Trump is also evidence of the very same intent:

  • Beginning in June, Putin’s public comments about the US presidential race avoided directly praising President-elect Trump, probably because Kremlin officials thought that any praise from Putin personally would backfire in the United States.

When diametrically opposed facts are used to support the same conclusion, you know you are not dealing with an intellectually serious, and intellectually honest, attempt to find the truth. You are dealing a hack job intended to reach a pre-determined conclusion.

Astoundingly, the report’s discussion of the events of 2016 consumes an entire five pages (and even that is padded), but its analysis of RT runs for seven. Apparently Captain Obvious obtained his commission in the intelligence services, and was seconded to write this report, because reading it you’ll learn that RT is a Russian propaganda outlet that has taken an anti-US line for years. Who knew? Did you know that? I surely didn’t!

I did, actually. In fact, I should sue the IC for plagiarism, because to support its case of Russian attempts to influence US politics it notes that RT was an early mouthpiece for the Occupy movement, precisely because of a desire to sow dissension in the US. Which I pointed out in November, 2011.

For this the CIA needs a black budget of tens of billions of dollars?

And citing Zhirinovsky as some representative of official Russian policy? Are you kidding me.?The man is a buffoon who provides Putin with a useful foil, and as an outlet for the whackier nationalist fringe.

There is no secret that Putin views the US as an adversary, and arguably an enemy. He likely does so because he actually believes it. He also likely does so because it is useful for domestic political reasons. Regardless, this is not news.

And it provides only the sketchiest circumstantial case in support of the allegation of a hack of emails, released via Wikileaks, undertaken at Putin’s direct order to interfere with the 2016 election.

I have an open mind. I am perfectly willing to evaluate fairly a serious case, backed by evidence. This is what I do for a living. I obviously have no illusions about Putin, or RT, or Zhirinovsky, so I am clearly not predisposed to take their side. But this report provides no evidence to support its sweeping “assessments.” It is little more than a Wikipedia page. It is, quite frankly, an insult to the intelligence of the American people.

Furthermore, it is being used to call into question the results of the election, and thereby undermine the legitimacy of the incoming president. This is a very serious–even grave–action that should only be undertaken with great caution. It is imperative to provide real evidence. Indeed, given the serious implications of these assertions, it would be defensible, and even necessary, to disclose some of the classified information supporting the “assessments” laid out in the report.

The failure even to pretend to present a serious case is an affront to the American people which actually trivializes the very serious allegations that have been made. It is quite befitting a low, dishonest administration unable to depart with grace, dignity, and honor, and respect for the electorate.

 

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December 29, 2016

Thank God for the 20th Amendment

Filed under: History,Politics,Russia — The Professor @ 8:36 pm

The 20th Amendment to the US Constitution, adopted in 1933, moved inauguration day from March 4 to January 20. And thank God for that, for imagine what Obama could do in those extra six weeks.

He’s already done enough, believe me. The most egregious was the failure to veto a UN resolution targeting Israeli settlements. Indeed, it has been plausibly pled that the administration was instrumental in pushing forward the resolution, though it has implausibly denied this.

There is a colorable case against the settlements. Be that as it may, Obama’s actions were low and destructive, rather than constructive. This is in part because Obama failed to make the case when there was political risk of doing so, waiting until he could no longer be held accountable. This is a serious matter that represented a sea change in American policy, and as such it deserved public debate. If Obama is so persuasive, he should have been able to make the case right? (More on his persuasiveness below.) Thus, the process was terribly flawed.

Moreover, it is clear that Obama was driven more by personal peevishness and dislike for Benjamin Netanyahu, rather than higher motives.

Insofar as the substance is concerned, the move will not increase the likelihood of a peaceful resolution between the Israelis and Palestinians. Indeed, it will likely make such an outcome less likely, because it will encourage Palestinian intransigence by encouraging their belief that they can achieve through the UN what they cannot achieve at the bargaining table. Trump will no doubt attempt to disabuse them of these notions, but much of the damage has already been done. This is a mess that Trump will have to clean up, at the cost of diverting attention from other pressing matters. It is, in other words, an unnecessary complication driven mainly by malice.

Another 11th hour Obama move was putting millions of acres of offshore areas off-limits for oil and gas drilling. In the short run, this is unlikely to be a major impediment to US energy production, especially in the expensive-to-drill Arctic, because exploration and development in these regions is currently uneconomic at prevailing prices. But Obama specifically intended to make his action difficult to reverse, so it may bind in the future. Again, the process here was high-handed and autocratic, resembling a ukase more than a considered executive action subject to legislative or legal check.

Which brings us to today’s action, the sanctioning of senior members of Russian intelligence agencies (notably the GRU), the expulsion of 32 diplomats for spying, and the restriction of their use of some consular properties, in retaliation for alleged hacking of the election. To justify the action, the FBI and Homeland Security released a lame report, befitting of a lame duck administration. The report discloses that–I hope you are sitting down–government agencies and employees are routinely subject to hacking attempts, most notably phishing attacks.

This is news? Um, no. FFS, who isn’t routinely subject to phishing attempts? Nobody. The main difference is that most people (unlike Podesta) have the good sense not to be a real big phish.

What is rather shocking is the administration’s going to Code Red on this, after its rather blasé response to far more serious hacks, notably the OPM disaster, and hacks of the White House and State Department and various defense contractors. Back then, they were all Alfred E. Neuman “what, me worry?” Suddenly it’s a grave threat, because there is a desperate need to explain away a stunning defeat of the candidate that Obama expected to protect his legacy, rather than dismantle it. Even if the allegations regarding Russian interference are correct, the damage is far less than these other cyberattacks, but the public response is inversely proportional to the harm inflicted.

Notably missing from the document is any specific mention of the DNC or Podesta emails, or of Wikileaks: it is a generic description of a virtually continuous stream of activity carried out by numerous state and non-state actors. Most bizarrely, as for attributing the attacks to Russia, we are merely given this ipse dixit, with no supporting evidence: “However, public attribution of these activities to RIS [Russian Intelligence Services] is supported by technical indicators from the U.S. Intelligence Community, DHS, FBI, the private sector, and other entities.” Maybe they figure if they told us more, they’d have to kill us all. So they’re doing us a favor by keeping us in the dark.

This “trust me” attribution is undermined by a header on the document:

screen-shot-2016-12-29-at-7-34-50-pm

In other words, this is classified “Don’t Quote Me on This! But it’s totally legit!”

Pathetic.

Although ostensibly aimed at Russia, this move is more targeted at Trump. It leaves him with the unpalatable choice of sustaining a decision unsupported by any real publicly disclosed evidence, or reversing it and thereby triggering the “Trump is Putin’s Boy/Manchurian Candidate” shrieks. Russian (and Chinese, and Iranian, and Nork and . . . ) cyberattacks are an issue which the incoming administration will have to consider and address, and a less peevish president would have let it done so without interference.

I told a friend that this was aimed at Trump as soon as I heard of it. Then later I found out that I wasn’t alone in advancing this hypothesis:

“We think that such steps by a U.S. administration that has three weeks left to work are aimed at two things: to further harm Russian-American ties, which are at a low point as it is, as well as, obviously, to deal a blow to the foreign policy plans of the incoming administration of the president-elect,” Peskov said.

Obama puts me on the same side as Dmitry Fricking Peskov. This is what we’ve come to.

Russia reacted with some amusing snark. The best of which was this tweet. Hapless, indeed. Hapless, narcissistic and peevish.

One last amusing note. The administration also announced that it would engage in covert retaliation. (Limited time offer! Only good for three weeks!) What’s next in the oxymoron follies? The administration’s highly classified transparency initiative?

(The juxtaposition of Obama’s high dudgeon at alleged Russian interference with the 2016 elections–which, if it occurred, involved the disclosure of embarrassing facts–with his smack at Israel is particularly choice, given that Obama clearly attempted to influence Israel’s 2015 Knesset elections.)

I could go on, but I’ll leave it at these three Greatest Hits.

In between leaving behind manure piles for Trump to clean up, Obama has been giving interviews. These can best be summarized as: “I am wonderful. My only failing was I did a horrible job of telling everyone how wonderful I am, thereby allowing Fox News and Rush Limbaugh and the NRA to shape public perceptions of me”:

OBAMA: The — the problem is, is that we’re not there on the ground communicating not only the dry policy aspects of this, but that we care about these communities, that we’re bleeding for these communities…
AXELROD: Right.
OBAMA: … that we understand why they’re frustrated. There’s a — there’s a…
AXELROD: And the values behind these things.
OBAMA: And the values. And there’s an emotional connection, and part of what we have to do to rebuild is to be there and — and that means organizing, that means caring about state parties, it means caring about local races, state boards or school boards and city councils and state legislative races and not thinking that somehow, just a great set of progressive policies that we present to the New York Times editorial board will win the day. And — and part of…
AXELROD: But some of that would fall on us. I mean, I — take you and me because maybe we didn’t spend as much time on that project while you were here. I mean, we’re trying to save the economy and doing these other things.
OBAMA: Well, yeah. No, you know, I mean…
AXELROD: Our campaigns did it, but…
OBAMA: It’s interesting. You and I both, I think, would acknowledge that when we were campaigning, we could connect. Once you got to the White House and you were busy governing, then…
AXELROD: Right.
OBAMA: … partly, you’re just constrained by time, right? You are then more subject to the filter. And this is — you know, I brought up Fox News, but it was Rush Limbaugh and the NRA and there are all these mediators who are interpreting what we do, and if we’re not actually out there like we are during campaigns, then folks in — in a lot of these communities, what they’re hearing is Obama wants to take away my guns…
OBAMA: Obamacare’s about transgender bathrooms and not my job, Obama is disrespecting my culture and is primarily concerned with coastal elites and minorities. And so — so part of what I’ve struggled with during my presidency and part of what I think I’ll be thinking a lot about after my presidency is how do we work around all these filters?
And it becomes more complicated now that you’ve got social media, where people are getting news that reinforces their biases and — and separates people out instead of bringing them together. It is going to be a challenge, but look, you look at what we did in rural communities, for example…

Apparently not realizing that the 2016 election (not just for president, but for the House, the Senate, and state offices) was largely a repudiation of him and his presidency, Obama stated presumptuously that he would have been able to defeat Trump and win a third term.

Obama says he will take some time to “be quiet for a while” to “still myself” and “find my center.” Take your time! As much time as you like!

Looking at the bright side, Obama says he is going to dedicate himself to rebuilding the Democratic Party. Given that he’s the one that singlehandedly led it to the brink of catastrophe, this is great news. Sort of like having someone you don’t really like hire the Three Stooges to fix his plumbing.

The 20th Amendment was adopted because a lame duck Hoover administration was unable to respond decisively to the economic crisis that gripped the country in early-1933. The amendment was intended to prevent the government being hamstrung for months in a future crisis occurring during a transition to a new administration. But in retrospect, the real virtue of the 20th is not that it accelerates the ability of an incoming president to deal with crisis: it is that it limits the time that a departing president has to wreak havoc. This is especially important when the departing president is preternaturally vain and narcissistic (even by comparison with other politicians, who are only naturally vain and narcissistic), when he is unconstrained by accepted norms and traditions, and when there is no political cost to be paid for indulging his peeves and pursuing his vendettas. One shudders to think what Obama would have done with an extra six weeks to act with no means of holding him to account.

Cromwell’s parting words to the Rump Parliament are apposite here: “You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go.” Fortunately, the 20th Amendment ensures that Obama will go sooner than he would have without it. And thank God for that.

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December 25, 2016

A Christmas Miracle in Moscow?

Filed under: Economics,Energy,Politics,Russia — The Professor @ 12:27 pm

Putin gave his annual marathon address a few days ago. As usual, some of the things he said were quite sensible. Some things were more debatable. And some things were just codswallop:

Speaking at an annual press conference on Friday, Mr Putin said that “foreigners” had “transferred the money into the Russian budget in full.” The [Rosneft-Glencore-QIA] deal is worth Rbs700bn ($11.5bn).

This echoes a Sechin statement from 9 days ago:

Rosneft CEO Igor Sechin reported to Russian President Vladimir Putin that the federal received all proceeds from privatization of a 19.5% stake in Rosneft, according to Presidential spokesman Dmitry Peskov.

“Sechin told Putin that all funds from Rosneftegas were transferred to the budget,” Peskov said.

There is some ambiguity here: Putin could have been referring to “the foreigners'” equity stakes. But that would leave open the question of where the balance of the money came from, and there is no way that Russia has received the entire $11.5b from “foreign” sources. Note that the bank (Intesa Sanpaolo) that had been named–by Rosneft–as leading the funding for the purchase has said that it’s still thinking about it:

Intesa said earlier this week that its “potential involvement” in the deal was “still under evaluation.” Financial regulators in Rome are examining whether Intesa Sanpaolo’s financing of a €10.2bn investment in Russian oil group Rosneft complies with sanctions

No other foreign bank or banks have stepped up to provide funding.

Maybe Glencore and QIA would have made their equity investment without financing for the balance of the purchase price. But I doubt it. There is no way Rosneftgaz would have parted with ownership of the 19.5 percent stake in Rosneft without being paid in full. So where did the money come from? Either it came from Russian sources, or the deal is not done–both which would be contrary to what Putin asserts. And if it’s from Russian sources, that would give to lie to Sechin’s and Putin’s original claims that all the money would come from foreign sources.

So where did it come from (assuming that it came from anywhere at all)? Some possibilities:

  • Rosneftgaz. Note Sechin’s statement that “all funds from Rosneftegas were transferred.” Rosneftgaz owned (owns?) the shares. Perhaps it made a payment to the budget from its own funds, and retained ownership of shares in anticipation of selling them to the Glencore-QIA consortium at a later date. (This was the common belief as to how the “privatization” would occur prior to the announcement of the Glencore-QIA consortium.) But there is no way that Rosneftgaz transferred $11.5b received from foreigners.
  • Rosneft. It is interesting that on December 5 Rosneft announced plans to issue about $9b of bonds. Add that $9b to the amount allegedly being invested by the consortium, and you get pretty close to the purchase price for the 19.5 percent stake. (Coincidence?) The bonds haven’t been issued yet (apparently), but Rosneft could borrow from Russian banks in anticipation of repaying the loan with the proceeds from the bond issue. More speculatively, the Russian banks could have turned around and used a loan extended to Rosneft as collateral to a loan from the Central Bank of Russia, making the CBR the ultimate funding source. (John Helmer asserts that this is the case.)
  • Russian banks. Russian banks could have lent the money to the consortium. Alternatively, Russian banks could have lent to Rosneft, Rosneftgaz, or both.

But it is incontestable that either (a) the deal isn’t really done, or that (b) contrary to the statements trumpeted at the start of the deal, it was primarily funded by Russian banks, rather than western ones.

We now do have some idea of what an “appropriate Russian bank” is. (That was the mysterious phrase used in Glencore’s release to refer to a Russian bank providing an indemnity to Glencore.). RBC reports that Gazprombank is involved in the transaction. The Russian government operates under the fiction that Gazprombank is not a state bank. Putin had said that Russian state banks would not be involved, because that would not be a true privatization. The obvious inference is that an “appropriate” bank is a non-state one.

Even looking beyond whether Gazprombank is reasonably considered a non-state bank, (a) it was supposed to be indemnifying Glencore’s borrowing from western banks to fund the purchase, not providing the funding itself, and (b) on its own, it wouldn’t have the scratch to finance the entire purchase. Putting all this together, it means that either (a) the money is coming from other banks–which have to be Russian state banks (most likely Sberbank and VTB), or (b) the deal ain’t done.

It is interesting to note that neither Glencore nor QIA have made an announcement that the deal has closed. Indeed, they declined comment when asked about Putin’s statement. If the deal has closed, Glencore would have said something. Western banks funding the deal would have said something. The silence speaks volumes.

What accounts for the reticence of Intesa, and other western banks? Perhaps it’s coincidence, but Intesa was just fined $235 million for “anti-money laundering failures and violations of bank privacy laws.” The fine was levied by New York state regulators, not the Feds. Furthermore, lending to fund the transaction would not appear to violate sanctions, because it does not involve the purchase of new equity. However, Intesa and other western banks (and others have to get involved, because Intesa could not afford to finance it itself) know that there are many ways that the US government could express its displeasure at doing a deal that adhered to the letter of sanctions, but violated the spirit (as interpreted by the Treasury Department). The fine may have have gotten Intesa’s (and other banks’) minds right–and that may have been the point.

In sum, there is no way that $11.5b of western money has been transferred to the Russian budget to pay for a 19.5 percent stake in Rosneft. Thus, Putin was telling a stretcher at his presser.

Or perhaps it was a Christmas miracle. Money magically appeared in Rosneftgaz’s kitty, which it then generously transferred to the Russian government budget, out of the goodness of its heart in the spirit of the season. That would make as much sense as the story Putin spun.

And speaking of Christmas miracles, I hope that all my loyal readers are favored with one as well. Have a Merry Christmas, and a Happy New Year.

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December 18, 2016

The eReformation: Every Man His Own Editor

Filed under: Politics,Russia — The Professor @ 8:45 pm

The concept of “fake news” is running neck-and-neck with “Putin Did It!” as the leading explanation for the inexplicable (inexplicable to the self-identified elite, anyways). These explanations sometimes overlap, when the Russians are blamed for disseminating fake news, never mind the fact that what the Russians are primarily blamed for (the DNC and Podesta leaks) was anything but fake: it was all too real. Indeed, perhaps the most egregious example of fake news is the mantra that the leaks are fake news. (A new competitor for this dubious honor is the WaPoo’s and NYT’s repetition of the claim that the FBI and the DNI have endorsed the CIA’s claim that the Russians hacked to help Trump, based solely on the (ironically) leaked ipse dixit of the CIA.)

The idea that fake news is somehow, well, new, is farcical. All that has changed is the means of dissemination. I remember vividly poorly printed flyers distributed in Chicago making lurid accusations about Harold Washington. (Ironically, some of the people bewailing fake news now were quite likely involved in some of those old school Chicago antics.) But go back centuries: American political newspapers and pamphlets in the 18th and 19th centuries contained slanderous falsehoods.

But “fake news” has become a thing because Hillary et al are desperate for some excuse for Trump’s triumph. More sinisterly, they are panicking at the realization that they no longer control the flow of information, which once gave them a decided political advantage. They are all about narratives, and when people depended on traditional media channels for news, it was much easier to control the narrative. Now that control is slipping away, they are desperately trying to regain their dominance by enlisting major social media companies in a campaign to crack down on alleged fake stories on their platforms. In the case of Facebook, this involves employing allegedly independent fact checkers, who are in fact made members of the leftist media establishment.

What has obviously happened is that the Internet has disintermediated traditional news media. There are so many channels through which stories (true and false) can flow that the traditional gatekeepers, and the beneficiaries of a more controlled media environment (namely, the political establishment), have lost control. This is inducing hysteria and a panicked effort to regain it.

This reminds me of the Reformation, which disintermediated the incumbent religious hierarchy, and the rulers who relied on the Church to exert social control. Then, the establishment railed at false theology. Today, the establishment rails at false news. Then, the translation of the Bible into the vulgate allowed individuals to make their own theological judgments outside the authority of the institutional church: today, the ability of people to access myriad stories and opinion pieces allows them to make their own political and social judgments without the authority of media or political mandarins. Then, the phrase was “every man his own priest”: today, it could be “every man (or woman) his (or her) own editor.” In the 16th century, the elite–the Church and many secular rulers–reacted to the popularization of religion in by attempting to reassert their religious and social authority over the masses, at times with violence.  In 2016 what passes for an elite is attempting to reassert its ideological and social authority over the masses. As yet, there has been no violence. But it’s early days yet.

The Counter-Reformation ultimately failed because the underlying technological (e.g., printing) and social forces overwhelmed the ability of traditionalists to restore their authority. I expect that the same will be true in the case of the ongoing eReformation. What Facebook and other social media are attempting to do will likely be little more than a futile rearguard action. It is ironic, and somewhat pathetic, that companies which are themselves the product of the technology that disintermediated information are now trying to impose themselves as the new information intermediaries: they certainly like the profits that the technology has showered upon them (well, not Twitter), but are deeply frightened about how the that technology has liberated the reliance of the masses on the elite for their information. They want their cake, and to eat it to.

But this will fail. The contradictions here are so glaring that I am tempted to resort to Marxian language to describe them. I will resist the temptation, and merely conclude by saying that Facebook and Twitter and all of the other would be intermediaries will not be able to surmount these contradictions. And thank God for that.

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December 16, 2016

Who is the Biggest Winner From the Blame It on Vlad Frenzy? Vlad.

Filed under: Politics,Russia — The Professor @ 8:47 pm

Hillary Clinton is busy crafting a narrative to explain her crushing defeat. Not surprisingly, it is a narrative in which she bears no personal responsibility. Instead, blame attaches to bad men, namely the FBI’s James Comey and Vladimir Putin:

There were some unprecedented factors that I don’t think we can ignore, because to do so is at our peril. Now, don’t take it from me. Take it from independent analysts. Take it from the Trump campaign. Take it from Nate Silver, who’s pointed out that swing-state voters made their decisions in the final days, breaking against me, because of the FBI letter from Director Comey. And Nate Silver believes — I happen to believe this — that that letter most likely made the difference in the outcome. But we’re also learning something more every day about the unprecedented Russian plot to swing this election. And this is something every American should be worried about. You know, we have to recognize that, as the latest reports made clear, Vladimir Putin himself directed the covert cyber attacks against our electoral system, against our democracy, apparently because he has a personal beef against me.

Poor, poor victim Hillary. She had been such an amazingly successful and strong Secretary of State that Putin was going to stop at nothing to thwart her.

Sure. Whatever gets you through the night, Hillary.

The CIA is doing its best to bolster the narrative, by outrageously leaking the content of letters alleging that it knows that Putin personally directed hacks against the Democrats for the express purpose of electing Trump and defeating Hillary. Just how the CIA knows what went on in the inner sanctum of the Kremlin (and between Putin’s ears) must remain left to the imagination. The FBI and the DNI were not willing to agree with the CIA’s first claim about Putin’s intent. So the CIA leaked another letter, in which CIA Director Brennan allegedly told agency staff that the FBI and DNI now agreed with the CIA. However, neither Comey nor Clapper have stated this publicly. Instead, the WaPo and other mainstream outlets are treating Brennan’s unsubstantiated assertion (which contradicts the FBI’s and DNI’s previous denials) as fact.

This is beyond outrageous. First, the CIA should make its statements on matters of such gravity publicly and provide evidence. Ex cathedra statements released anonymously and devoid of any supporting evidence are clearly inadequate given the gravity of this situation, and the political ramifications of Brennan’s actions. Second, if the FBI and DNI agree, then Brennan, Clapper, and Comey should release a joint statement signed by all. Third, the forum for such disclosures is not leaks to the WaPo (apparently the designated mouthpiece for the agency) but in formal statements, and in testimony before the relevant Congressional committees.

But the CIA pointedly declined to make anyone available to meet with the intelligence committees, despite the fact that they had been asked specifically to do so. This is just appalling.

So why is Brennan doing this? The only plausible explanation is that it is an attack on Trump intended to de-legitimize the election and undermine his presidency before he even raises his right hand to take the oath of office. The CIA has much practice doing this abroad. It is a very siloviki, Chekist thing to do. Ironic, isn’t it?

Trump must act forcefully to submit this agency to presidential control. Given all the gnashing of teeth over the threat posed by Mattis to civilian control over the military, the silence from these quarters over the CIA is stunning–and telling.

There is still no definitive evidence that Wikileaks obtained the offending documents from the Russians: Assange claims that it was not a nation state. One of Assange’s friends, a former UK ambassador to Uzbekistan, claims that he knows who provided the information, and that it was an insider: as I noted from the outset, this is totally plausible. (Assange is apparently irritated at this claim.)

As for the claim (endorsed by Hillary) that the DNC and Podesta documents were released by the Russians specifically to harm her, then why were none of her missing emails leaked? Or are we supposed to believe the fairy tale that hers was the one computer in the entire US that was immune from cyberattack?

Further, this is all a sideshow. What harmed Hillary was the substance of the leaked documents, which showed her and the Democratic Party apparatus to be manipulative and corrupt. Comey’s letters were damaging because they drew attention to Hillary’s palpable dishonesty and high-handedness about her private server. It was the substance was fatal, but Hillary has not-and I warrant will not-addressed the issue of the substance in a serious way.

It is also amazing to watch the schizo behavior of the Democrats and anti-Trump fellow travelers (e.g., Tom Nichols). They are reacting with fury to criticism of the CIA’s behavior. How dare we question these patriots? They are consummate government professionals, working hard to protect us! Yet at the same time they want us to believe that the FBI are partisan hacks, and that the Bureau is a virtual Trumpland that wanted to see Hillary go down in flames.

So let’s see. CIA=non-partisan professionals and patriots. FBI=unprofessional partisan hacks. How does that work, exactly? How do two agencies of the US government develop alpha and omega cultures? The intellectual incoherence here is beyond belief. But those pushing these utterly incompatible stories apparently see no contradiction.

It is also beyond bizarre to see the Democratic Party unabashedly defend the CIA and treat any criticism of it as near treason. Frank Church must be rolling in his grave.

Although there is an element of absurdity to all this, it is a very dangerous set of developments. Hillary and the Democratic Party are crafting something analogous to the Stab in the Back narrative that the German militarists pushed in the aftermath of WWI. Just like Erich von Ludendorff et al, Hillary et al are denying any responsibility for their defeat. Instead they blame it on malign forces that deprived them of the victory that they deserved. Such denial prevents an honest reckoning with the past, and feeds bitterness and resentment. It poisons politics, divides Americans, undermines respect for existing institutions, and will feed extremism. Moreover, Hillary’s narrative basically insults tens of millions of Americans because she insinuates that they were either unwitting dupes of a malign plot hatched abroad, or enthusiastic supporters thereof. This will make any rapprochement in the US impossible, leaving both sides daggers drawn for the foreseeable future. Call it The Deplorables vs. The Better Thans. This will not end well.

That is, Hillary’s indulgence of her amour propre will prevent any political reconciliation in the United States. This is an act of incredible selfishness and destructiveness. But considering who she is, this comes as no surprise.

For his part, Obama spoke on the alleged Russian interference in the election in a press conference today. He said that he told Putin to “cut it [hacking] out.” That’s telling him. Did Obama draw a red line? That’s always a sure winner. Obama also channeled his inner Dean Wormer, and put Putin on Double Secret Probation. That is only a slight exaggeration: Obama said that the US would retaliate, but won’t say how:

President Obama said the U.S. must retaliate against Russia for the election-season hack into Democrats’ emails and that his administration will do so on its own time frame — perhaps in secret.

“Some of it may be explicit and publicized, some of it may not be,” Obama said during an interview that aired on National Public Radio on Friday morning.

“I think there is no doubt that when any foreign government tries to impact the integrity of our elections … we need to take action,” Obama told NPR host Steve Inskeep. “And we will, at a time and place of our own choosing.”

Dude. You are only going to be in office for 35 more days. You don’t have a lot of time to choose from.

Proving that he has learned nothing and forgotten nothing, Obama continued his old habit of belittling Putin and Russia:

After unleashing a string of putdowns about Russia, describing America’s Cold War adversary as “a weaker country” that “doesn’t produce anything anyone wants to buy except oil and gas and arms,” Obama conceded the country could exploit political divisions in the United States.

“They can impact us if we lose track of who we are. They can impact us if we abandon our values,” Obama said.

Yes. Because the putdown strategy has worked so, so great in the past several years. (What, no comments about Putin’s posture?) Talk about the antithesis of speak softly and carry the big stick. This approach will only encourage Putin, and earn his disdain.

In the years after 911, the phrase “if we do X the terrorists will have won” became common and the subject of ridicule–and justly so. Well, in the present case by obsessing over Putin, he does win. Exaggerating his influence in order to absolve oneself of responsibility, and to avoid coming to grips with the repudiation of large numbers of Americans–as Hillary and most Democrats and NeverTrumpers are doing–will sow strife in American politics and bolster Putin’s standing both in Russia and abroad. And as a result, the biggest winner from this 21st century counterpart to waving the bloody shirt will be one Vladimir Vladimirovich Putin.

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Clearinghouse Resilience and Liquidity Black Holes

Filed under: Clearing,Commodities,Derivatives,Economics,Politics,Regulation — The Professor @ 5:11 pm

About six weeks ago I wrote a post on the strains put on clearing by Brexit. This informative post by Clarus’ Tod Skarecky provides some very interesting detail about the mechanics of the LCH’s margining mechanism.

One way to summarize it is to say that the LCH was a liquidity black hole. Not only did it collect intra-day and end-of-day variation margin from losers that was paid out to winners only with a delay, it also collected Market Data Runs, which were effectively intra-day initial margin top-ups. A couple of perverse features. First, a position that initially had a loss that triggered an MDR outflow had to pay out, but if the market turned in its favor intra-day, it didn’t get that money back until the following day. Second, a firm that had a loss that triggered an MDR outflow had to pay out, and if the position incurred a loss on the day, it still had to pay variation margin, and didn’t receive the MDR back until the next day: that is, there was”double dipping.”

Tod puts his figure on the logic (crucially, the logic from LCH’s perspective): “Heck if I managed credit risk at a firm, I’d always choose to be paid now rather than later.” Definitely. That minimizes credit risk. But look at how much liquidity was sucked up in order to do this.

Variation margin is bad enough: despite the (laughable) claim of the BIS some years back, the fact that variation margin is recycled does not mean that it does not create liquidity strains. After all, (a) liquidity demand arises due in large part to differences in timing between the receipt of cash and the payment thereof, and the clearing mechanism (in which the CCP pays out VM some hours after it receives VM) creates such timing differences, and (b) even absent payment timing differences, the VM receivers would have to lend to the VM payers, which is problematic especially during stressed market conditions. But the LCH IM top up exacerbates the problem because the cash is stuck in the clearinghouse overnight, and therefore cannot possibly be recirculated. More liquidity becomes less accessible.

Again, this is understandable from LCH’s microprudential perspective: it reduces the likelihood that it will become insolvent or illiquid. But just because this is sensible from a microprudential perspective does not mean it is macroprudentially sensible. In fact, it is anything but sensible: it greatly adds to liquidity demand, particularly during periods of time when liquidity is likely to be scarce, and when liquidity freezes are a serious risk.

This is a perfect example of the “levee effect” I’ve written about for years: raising the levee around the LCH increases the chances of its survival, but just redirects the stresses to elsewhere in the system.

Note the irony here. Clearing mandates were sold on the idea that there were pervasive externalities in uncleared derivatives markets, due primarily to the potential for default cascades in these markets. But clearing (supersized by mandates, in particular) creates externalities too. Here LCH does things that are in its interest, but which impose costs on others. It has a contractual relationship with some of these (FCMs), so there is some potential that externalities involving these parties can be mitigated through negotiation and changing contracts. But there are myriad parties not in privity of contract with LCH, and which LCH may not even know of, who are impacted, perhaps severely, by a liquidity shock exacerbated by LCH’s self-preserving actions.

In other words, clearing mandates don’t internalize all externalities. They create them too. And given the severe dangers of liquidity crises, the liquidity externality that clearing creates is particularly troubling.

Outgoing CFTC Chairman Timothy Massad says, don’t worry, be happy!:

Brexit’s Impact on Clearing Activity

Let’s first look at the impact on clearing activity. It’s important to remember first that clearinghouses mark all products to market every day, and require that participants with market losses post margin every day, sometimes more than once a day. Margin payments must be paid promptly because for every payment made to the clearinghouse, the clearinghouse must make a payment to another participant who has gains. The clearinghouse always has a balanced or “matched” book.

Even though margins were increased in advance of the vote, the volatility resulted in very large margin calls on June 24.

Clearing members paid $27 billion dollars in variation margin across the five largest clearinghouses registered with the CFTC. This was $22 billion dollars greater than the previous 12-month average—over five times larger. The good news is no one missed a payment, no one defaulted.

Supervisory Stress Tests

The results after Brexit confirmed what we recently found in our own internal testing: resilience in the face of stressful conditions. Last month, CFTC staff released a report detailing the results of a series of stress tests we performed on the five largest clearinghouses under our jurisdiction, which are located in the U.S. and the UK. Our tests assessed the impact of stressful market scenarios across these clearinghouses as well as their clearing members, many of whom are affiliates of the world’s largest banks.

We developed a set of 11 extreme but plausible scenarios based on a number of factors, including historical price changes on dates when there was extreme volatility. By comparison, our assumed price shocks were several times larger than what happened after Brexit. We applied these scenarios to actual positions as of a specific date. And we looked at whether the pre-funded resources held by the clearinghouse—in particular, the initial margin and guaranty fund amounts paid by clearing members as well as the clearinghouse’s capital—were sufficient to cover any losses.

Still not getting it. The discussion of stress tests essentially repeats the same mantra as LCH: it is a decidedly microprudential treatment that focuses on credit risk, not liquidity risk. The discussion of margins is perfunctory, despite the fact that this is what gave market participants serious worries on Brexit Day. No discussion of what extraordinary efforts were required to ensure that all payments were made. No discussion of whether this would have been possible during a bigger–and unanticipated–price shock. No discussion of the liquidity externalities. No discussion of what would happen if operational difficulties (e.g., a technology problem in the payments system like the failure of FedWire on 10/19/87) interfered with the completion of payments. (More payments increases the likelihood that such an operational failure will jeopardize the ability of FCMs to complete them. And a failure to meet a call triggers a default.)

This “what? Me worry?” approach sounds so . . . 2006. And it is exactly this kind of complacency that makes me worry. The nature of the liquidity issue still has not penetrated many regulatory skulls.

This is most likely due to a severe case of target fixation. Clearing mandates were motivated by a desire to reduce credit risk, and all efforts have been focused on that. That is the target that regulators are fixated on, and in the pursuit of that target their field of vision has narrowed, with liquidity risk being largely outside it. It is obviously the target that CCPs are focused on. This is why I take little comfort in the belated efforts to make CCPs more resilient. The recipe for resilience is to demand MOAR LIQUIDITY. Which is also the recipe for a broader market crisis.

Analogous to the dangers of high powered incentives with multi-tasking when some activities can be measured more accurately than others, the mandate to reduce derivatives credit risk has led regulators and market participants–particularly market utilities like CCPs–to devote excessive effort to mitigating credit risk, even though it exacerbates liquidity risk.

I doubt the clearing portions of Title VII of Frankendodd will be eliminated altogether, but the incoming administration should seriously consider a major re-evaluation to determine how to address the serious liquidity issues that clearing mandates create.

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