Streetwise Professor

February 14, 2017

A Refreshingly Un-Straussian–and Evil–Statement from a Diehard Neocon

Filed under: History,Military,Politics — The Professor @ 4:33 pm

Many neoconservatives are devotees of Leo Strauss. Among the hallmarks of Straussian thought and rhetoric are indirection and concealment. The Straussian neocon does not make statements and arguments that are transparent to, understandable to, and have common meaning for, all. Instead he writes or speaks in a language that conveys very different meanings to the initiated, and to mere hoi polloi who are duped into supporting things from which they would recoil from in horror if they actually understood what is going on.

Thus, Bill Kristol is to be congratulated for being transparently evil, rather than deviously so as a Straussian would be. This afternoon he tweeted:

Obviously strongly prefer normal democratic and constitutional politics. But if it comes to it, prefer the deep state to the Trump state.

The phrase “deep state” has its origins in Turkey, and means that a nation’s true rulers are the security and intelligence apparatus working behind the scenes, rather than the duly constituted civil authorities to whom the said apparatus is formally subordinate. In the deep state, the de facto rulers are quite different from the de jure government: a very Straussian arrangement, come to think of it, because the surface appearance is completely at odds with the reality.

In addition to Turkey, Egypt is considered to be another exemplar of the Deep State phenomenon. And viewed objectively, a siloviki-dominated Russia is another exemplar. The Duma plays for show: the siloviki play for dough.

So it is ironic that someone who has excoriated Trump for his alleged affinity to Russia is an avowed supporter of bringing Russian (and Egyptian and Turkish) deep state methods to the United States. All because he doesn’t like the current occupant of the White House.

I called Kristol’s statement evil, and I mean that. It is evil unadulterated. The gravest threat to individual liberty and safety is an unaccountable state. The entire American Constitutional system of checks and balances is predicated on the bedrock principle that every person in every branch of government is accountable and subject to checks and balances that constrains him (or her) from wielding power not authorized under law and the Constitution.

Lincoln called this system “the last, best hope of earth.” And Bill Kristol is willing to sacrifice this last, best hope because he doesn’t like Donald Trump.

The Sorcerer’s Apprentice comes to mind here. Kristol blithely summons forces that he cannot control–and that no one can control. Once these powers are invoked, they will do as they will, not as Bill Kristol and all the others who are totally OK with an intelligence agency coup would like. Once the Deep State is empowered, it will not go away. It will be emboldened to enhance that power. Again, the siloviki model shows that clearly.

And there are so many historical examples that demonstrate how these bargains almost always go wrong. Consider the Roman rulers who invited barbarians to intervene on their side in internecine conflicts. . . . and then couldn’t get rid of the barbarians when “victory” had been achieved.

The Founders were deeply suspicious of a standing army because of the threat it posed to liberty and republican government. The United States has proved remarkably successful at constraining the uniformed military. But the intelligence establishment presents a threat far, far more dangerous than anything that the Founders could have possibly imagined, and a far greater threat than the uniformed military, precisely because it operates in the shadows and because it controls information–and information is power. It also controls misinformation and disinformation, and those are powerful too.

The right and proper way to deal with Donald Trump–or any president, for that matter–is to ensure that the existing system of checks and balances works, rather than undermine it in a way that will result in its destruction. We have already seen this in action. The Ninth Circuit–wrongly in my view, but that is not the point–has already stopped one administration initiative. The likelihood that Trump will get most of his legislative agenda through is extremely low. His executive orders have been more symbolic that substantive, precisely because the power of the presidency does have limits. For all his bluster, there are many ropes that keep Trump tied up like Gulliver.

It is beyond disgusting to see people like Kristol pay lip service to “normal democratic and constitutional politics,” and then cheer the subversion of those norms. Disgusting, but useful. At least those who actually do believe in democratic and constitutional politics know who they are fighting, and what those they are fighting stand for.

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February 13, 2017

The Intelligence Community Coup Continues

Filed under: History,Military,Politics,Russia — The Professor @ 8:27 pm

Update (2239 CST, 2/13/17). The pack has caught its quarry: Flynn has resigned. The taste of blood will just excite their appetite for more. Further, this will show that leaking works. Unless this is rooted out ruthlessly, this administration will die the death of 1000 leaks. Regardless of what you think of Trump, the ramifications of this are disturbing indeed.

The hounds are baying at the heels of National Security Advisor Michael Flynn. Flynn’s sin was to discuss sanctions with the Russian ambassador Sergey Kislyak before inauguration. Flynn denied this when the issue was allegedly raised.

Flynn’s denial has been challenged by the Washington Post, which relied on descriptions of intercepts of Flynn’s communications with the Russian ambassador. Flynn’s alleged dishonesty has allegedly led Trump to “evaluate” his status.

The substance of Flynn’s conversation with the Russian ambassador was benign. The WaPoo reports it thus:

Two of those officials went further, saying that Flynn urged Russia not to overreact to the penalties being imposed by President Barack Obama, making clear that the two sides would be in position to review the matter after Trump was sworn in as president.

“Kislyak was left with the impression that the sanctions would be revisited at a later time,” said a former official.

“Cool your jets.” Wow. How incendiary. Even if the interpretation placed on Flynn’s alleged words is correct, he did nothing more to say that sanctions would be part of broader discussions with Russia. This is a surprise why, exactly?

I further note that the WaPoo is basically serving as a ventriloquist’s dummy, dutifully mouthing “a former official’s” interpretation. (My nominee for the “former official”: Ex-CIA director and all around slug John Brennan.) Everything about “making clear” and “left with the impression” is the “former official’s” interpretation. Does he read minds? Kislyak’s in particular?

If Flynn is to be axed because he dissembled, every figure from every past administration should be sanctioned in some way. It’s almost amusing how the WaPoo is SHOCKED! SHOCKED! at the thought. FFS. Ben Rhodes comes out and says that the Obama administration lied to the media and the public as a matter of policy, and the WaPoo shrugged its shoulders so hard it took months of chiropractic treatment to straighten out.

And none of this is the real story. The real story is that this is just another act in the intelligence community’s attempted coup of the duly elected president of the United States. Consider the facts here. First, the intelligence community was surveilling Flynn’s communications. Second, it leaked those communications in order damage him and the president of the United States over a matter of policy disagreement.

The chin pullers seriously intone that Flynn may have violated the Logan Act, i.e., that he was conducting diplomacy as a private citizen. But if he was a private it was unlawful to surveil him without a warrant, or if his communications were intercepted while communicating with a legitimate target of surveillance, his communications had to be discarded/minimized, and certainly NOT leaked. (Exceptions include those communicating with Al Qaeda and other terrorist organizations. Russian ambassadors don’t count.)

If he was not a private citizen, the Logan Act allegation is bullshit. In that case, Flynn had some official status, and his communications were almost certainly classified, which would make leaking them a crime.

So whatever way you cut this, someone in the intelligence community has committed a crime, or multiple crimes.

This episode also gives the lie to the IC’s justification for not providing anything more than a Wikipedia entry to document alleged Russian hacking of the election. Recall that the IC claimed that releasing specific communications was impossible, because it would compromise sources and methods.

Um, this leak about Flynn doesn’t?

Evidently–and not surprisingly–the IC’s concerns about “sources and methods” are oh-so-situational, aren’t they?

This is all beyond the pale. Yet anti-Trump, pro-IC fanboyz (e.g., the execrable John Schindler) think it’s just great! Trump is the security risk, so everything’s fair! The ends justify the means!

Um, no. If these IC people have a basis to believe that they should resign publicly. They are not judge and jury. To arrogate those roles is a violation of the constitutional order, and they should be terminated forthwith, and prosecuted if they are revealing classified information. (Funny how Schindler was all for hanging Hillary from the highest tree for jeopardizing classified information on her server, but he’s all in with these leaks.)  Those who are currently outside government should be prosecuted as well.

The irony meter has exploded from being overloaded, but I will mention another irony: Schindler, Brennan, and other critics of Snowden constantly said that he should have taken his concerns through channels, rather than leaking classified material based on his own political views. More situational “ethics”: apparently this “go through channels” dictum is not operative when Trump or Flynn are involved.

Yet another irony: those baying the loudest here also constantly intone ominously about the threat that Putin and the siloviki pose. But what is the siloviki (one component of it anyways) but senior intelligence personnel acting outside the law in order to exercise power and decapitate political enemies and rivals? So those who warn of the danger of the Russian siloviki grab their pom-poms and lead the cheers for American siloviki.

Why is this happening? I think the problem is overdetermined, but there are a couple of primary drivers.

First, there is intense bad blood between Flynn and the CIA. This apparently goes back to Flynn’s opposition to the CIA’s glorious endeavors in Syria, most notably his incredibly prescient prediction of the rise of ISIS, and his insinuation that this would be the direct result of US policy (acting largely at behest of the oil ticks in the Gulf), either intentionally or unintentionally. This is payback, and also an attempt by the CIA in particular to defend its prerogatives against someone who is deeply skeptical of its (disastrous) machinations.

Second, it is a well known strategy of those who want to attack the king to strike at his trusted retainers first. This isolates the king; makes him reluctant to rely on others (because in so doing he makes them targets too); and sends message to those who dare to support the king.

It is for this reason that I believe that Trump will not throw Flynn to the hounds, at least not now when the baying and panting is at its most intense. He knows that it would just encourage his enemies to select a new fox once they tear this one to pieces. And he also knows that eventually they will be emboldened to go after him directly.

Regardless, this is an extremely dangerous turn of events. The intelligence community (which has a litany of failures to its “credit”) cannot be allowed to use leaks and surveillance to undermine the legal order, either because of a policy disagreement, a dislike of the man elected president, or to protect its institutional interests (including protecting it from being held accountable for past failures). Once upon a time the left–the Washington Post prominent among them–told us the same. But that was then, and this is now.

PS. I suggest you also read Spengler’s take on this, which is similar to mine.

 

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February 12, 2017

The Yemen Raid: Inherent Risk, Not Failure.

Filed under: History,Military,Politics — The Professor @ 1:43 pm

There has been a lot of controversy about the first (that we know of) major special operations raid carried out post-inauguration. The raid–in Yemen–did not go according to plan. A member of Seal Team 6 was killed. Two other Americans were seriously injured. A V-22 Osprey was damaged in a hard landing and had to be destroyed. Civilians were killed, including (allegedly) the 8 year old daughter of Anwar al-Awlaki, and several other women (who may, or may not, have been firing weapons).*

Immediately the raid was politicized. An ex-Obama administration official, one Colin Kahl, immediately took to Twitter to claim that, contrary to Trump administration statements, the raid had not been considered or planned under the Obama administration. Instead, Kahl claims, only a “broad package” of operations was discussed prior to the departure of the Obama administration, and this “information was shared” with the incoming administration.

I call bullshit. This kind of operation requires detailed planning and extensive intelligence collection, both of which take time. It takes more time for this to work its way up through the chain of command, including I might add a review by the lawyers to evaluate the risk of civilian casualties. There is no bleeping way in hell this went from a “broad package” to lead flying in a week. It would have been reasonable for the lame ducks to leave the decision to the new team, but it is risible to claim that this was an impromptu rush job undertaken by a rash Trump administration. (For one thing, there is no way Mattis would have signed off on any such thing.)

So what went wrong? Murphys Law. Shit happens. That is the nature of special operations raids. They are inherently risky, tightly coupled operations where pretty much everything has to go right in precise sequence. When they go wrong they tend to go horribly wrong, because they involve small elements who are usually outgunned, relatively immobile, and isolated if they lose the element of surprise or run into an obstacle that delays their quick ingress or egress.

These operations rely on surprise, speed, and sometimes brutal shock action.  All the planning and training and experience in the world cannot guarantee these things will work. The “for the want of a nail” phenomenon is baked into special operations.

Apparently the SEALs operating in Yemen in late-January lost the element of surprise, and rather than abort they relied on aggression to attempt to complete the mission. In so doing, they suffered casualties and inflicted a lot of them, including some on civilians.

This is nothing new. Almost exactly two years earlier, a raid to rescue western hostages in Yemen was compromised by a barking dog. A week before the election, a Special Forces team was shot up in Afghanistan because it ran into an unexpected gate: two very experienced SF men were killed and several others were wounded.

The Obama administration obviously owns that last one, and arguably is was more of a clusterfuck than what happened in Yemen last month. But you haven’t heard much about it, have you? Go figure.

As for the Osprey, they are prone to “brownouts” (i.e., the pilot losing his bearings when the huge rotors blow up a cloud of dust while landing), as occurred in Hawaii in 2015. They can also lose lift because they enter a vortex ring state. (This is the leading theory of the crash of the stealth helo during the bin Laden raid.) Again, this is another roll of the dice with this kind of operation with this kind of aircraft.

I could go on and on. The success rate of US (and also UK and Australian) special operators is amazing, but periodic disasters are part of the package.

As for the civilian casualties, that to is inherent in the nature of these operations, and the enemy against whom they are directed. These terrorists, be they in Afghanistan or Yemen or wherever, are typically embedded in the civilian population. In Afghanistan in particular, they are just part of the ordinary menfolk. Such is guerrilla warfare. Even if civilians are not targeted, they will be killed.

What happened in Yemen a couple of weeks back is not extraordinary, given the nature of the operation, and most importantly, the extent and intensity of these kinds of operations that the US is conducting in Southwest Asia, Africa, and the Middle East. Indeed, it is a testament to the skill of US special operators that these things don’t happen more often.

It is therefore incredibly disgusting to see this politicized. Yes, ex-Obama admin people and their water carriers in the media are primarily culpable in this incident, but they have help, notably from John McCain who really needs to STFU: his hatred of Trump leads him to make opportunistic statements (e.g., calling this mission a failure) that convey a very misleading picture of realities. This politicization does not help the US military, or enhance the effectiveness of its operations. Most of the politicized criticisms also tend to be blissfully ignorant of military realities.  There is a justification for having a debate about whether the current anti-terror strategy that relies heavily on high tempo special operations is worth the risk. But that discussion has to be predicated on the understanding that things like those that transpired in Yemen in January (and in December, 2014) are inherent to that strategy, and do not necessarily imply failure or incompetence.

*The only basis for the claim that Awlaki’s daughter was killed is a statement by her grandfather.

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February 11, 2017

Risk Gosplan Works Its Magic in Swaps Clearing

Filed under: Clearing,Commodities,Derivatives,Economics,Politics,Regulation — The Professor @ 4:18 pm

Deutsche Bank quite considerately provided a real time example of an unintended consequence of Frankendodd, specifically, capital requirements causing firms to exit from clearing. The bank announced it is continuing to provide futures clearing, but is exiting US swaps clearing, due to capital cost concerns.

Deutsch was not specific in citing the treatment of margins under the leverage ratio as the reason for its exit, this is the most likely culprit. Recall that even segregated margins (which a bank has no access to) are treated as bank assets under the leverage rule, so a swaps clearer must hold capital against assets over which it has no control (because all swap margins are segregated), cannot utilize to fund its own activities, and which are not funded by a liability issued by the clearer.

It’s perverse, and is emblematic of the mixed signals in Frankendodd: CLEAR SWAPS! CLEARING SWAPS  IS EXTREMELY CAPITAL INTENSIVE SO YOU WON’T MAKE ANY MONEY DOING IT! Yeah. That will work out swell.

Of course Deutsch Bank has its own issues, and because of those issues it faces more acute capital concerns than other institutions (especially American ones). But here is a case where the capital cost does not at all match up with risk (and remember that capital is intended to be a risk absorber). So looking for ways to economize on capital, Deutsch exited a business where the capital charge did not generate any commensurate return, and furthermore was unrelated to the actual risk of the business. If the pricing of risk had been more sensible, Deutsch might have scaled back other businesses where capital charges reflected risk more accurately. Here, the effect of the leverage ratio is all pain, no gain.

When interviewed by Risk Magazine about the Fundamental Review of the Trading Book, I said: “The FRTB’s standardised approach is basically central planning of risk pricing, and it will produce Gosplan-like results.” The leverage ratio, especially as applied to swaps margins, is another example of central planning of risk pricing, and here indeed it has produced Gosplan-like results.

And in the case of clearing, these results are exactly contrary to a crucial ostensible purpose of DFA: reducing size and concentration in banking generally, and in derivatives markets in particular. For as the FT notes:

The bank’s exit will reignite concerns that the swaps clearing business is too concentrated among a handful of large players. The top three swaps clearers account for more than half the market by client collateral required, while the top five account for over 75 per cent.

So swaps clearing is now hyper-concentrated, and dominated by a handful of systemically important banks (e.g., Citi, Goldman). It is more concentrated that the bilateral swaps dealer market was. Trouble at one of these dominant swaps clearers would create serious risks for CCPs that they clear for (which, by the way, are all interconnected because the same clearing members dominate all the major CCPs). Moreover, concentration dramatically reduces the benefits of mutualizing risk: because of the small number of clearers, the risk of a big CM failure will be borne by a small number of firms. This isn’t insurance in any meaningful way, and does not achieve the benefits of risk pooling even if only in the first instance only a single big clearing member runs into trouble due to a shock idiosyncratic to it.

At present, there is much gnashing of teeth and rending of garments at the prospect of even tweaks in Dodd-Frank. Evidently, the clearing mandate is not even on the table. But this one vignette demonstrates that Frankendodd and banking regulation generally is shot through with provisions intended to reduce systemic risk which do not have that effect, and indeed, likely have the perverse effect of creating some systemic risks. Viewing Dodd-Frank as a sacred cow and any proposed change to it as a threat to the financial system is utterly wrongheaded, and will lead to bad outcomes.

Barney and Chris did not come down Mount Sinai with tablets containing commandments written by the finger of God. They sat on Capitol Hill and churned out hundreds of pages of laws based on a cartoonish understanding of the financial system, information provided by highly interested parties, and a frequently false narrative of the financial crisis. These laws, in turn, have spawned thousands of pages of regulation, good, bad, and very ugly. What is happening in swaps clearing is very ugly indeed, and provides a great example of how major portions of Dodd-Frank and the regulations emanating from it need a thorough review and in some cases a major overhaul.

And if Elizabeth Warren loses her water over this: (a) so what else is new? and (b) good! Her Manichean view of financial regulation is a major impediment to getting the regulation right. What is happening in swaps clearing is a perfect illustration of why a major midcourse correction in the trajectory of financial regulation is imperative.

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February 5, 2017

Those Who Control the Past Control the Future, Climate Data Edition

Filed under: Climate Change,Politics — The Professor @ 10:33 pm

Advocates of the anthropogenic climate change hypothesis excoriate anyone who expresses skepticism as being anti-science. One of the hallmarks of true science is uncompromising commitment to the integrity of data. Ironically, this is a norm that warmists repeatedly transgress.

Case in point: the influential paper by Thomas Karl and coauthors which purports to show that the 15+ year pause in warming was chimerical. But a former NOAA scientist who was the primary steward for temperature data, and the designer of climate data protocols, has blown the whistle on this article. Dr. John Bates asserts that the data was fundamentally flawed, that the basic protocols were not followed, that Karl et al repeatedly made choices that biased their results in favor of finding warming, and that they failed to submit the data for review. To give just one example of their dubious choices, these “scientists” forced the more reliable buoy sea surface temperature data to conform with less reliable data collected the old fashioned way by ships.

But it gets better. And by better, I mean worse: “the computer used to process the software had suffered a complete failure,”  which means the study cannot be replicated. (What?!? No backup?!? How is that possible?)

Replication is another bedrock principle of science. Since Karl et al cannot be replicated, for all intents and purposes the article does not exist. The journal that published it–Science–should withdraw the paper, especially since Karl et al violated the journal’s policies involving data archiving and documentation. Indeed, Science should repudiate it. It should be removed from all citation indices, and any journal that published a paper that cites it should carry an errata listing all of these articles. Further, the conduct of the researchers should be evaluated in order to determine whether any federal funding supporting the research should be returned.

Would that this were a one-off. Alas, basic temperature data has been manipulated in a perfect illustration of Orwell’s dictum: “He who controls the past controls the future. He who controls the present controls the past.”  Those who control the data in the present have “adjusted” historical temperature records repeatedly, and almost uniformly in a way that shows more rapid warming. This has involved, for instance, reducing recorded temperatures from decades ago–most notably from the 1930s, which was a very warm period in the original, unadjusted data. By making the past cooler, these manipulations have increased the estimated rate of temperature increase, thereby advancing the warming narrative, and exerting control over current and future policy. The adjustments have not been done transparently, and they cannot be reviewed or replicated. God only knows if the original data has been retained with its integrity intact.

But even that Orwellian fiddling with the past was not enough to eliminate all anomalous evidence: the pause was flatly inconsistent with the predictions of the climate models, and in an effort redolent of “hiding the decline” of Climategate infamy, Bates makes a compelling argument that Karl tortured the data in order to “bust” the pause. And before anyone could check, checking became impossible.

It is not too much of an exaggeration to say that the data have been raped, by Karl in the present instance, and by many others who are actually allegedly the stewards of the basic records. This is profoundly unscientific, which makes the arrogant posturing of individuals like Karl, who presume to judge those who disagree with them as being anti-science, all the more insufferable. It also makes one wonder what they are afraid of, if the evidence regarding warming is so overwhelming and incontrovertible.

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February 4, 2017

The Regulatory Road to Hell

One of the most encouraging aspects of the new administration is its apparent commitment to rollback a good deal of regulation. Pretty much the entire gamut of regulation is under examination, and even Trump’s nominee for the Supreme Court, Neil Gorsuch, represents a threat to the administrative state due to his criticism of Chevron Deference (under which federal courts are loath to question the substance of regulations issued by US agencies).

The coverage of the impending regulatory rollback is less that informative, however. Virtually every story about a regulation under threat frames the issue around the regulation’s intent. The Fiduciary Rule “requires financial advisers to act in the best interests of their clients.” The Stream Protection Rule prevents companies from “dumping mining waste into streams and waterways.” The SEC rule on reporting of payments to foreign governments by energy and minerals firms “aim[s] to address the ‘resource curse,’ in which oil and mineral wealth in resource-rich countries flows to government officials and the upper classes, rather than to low-income people.” Dodd-Frank is intended prevent another financial crisis. And on and on.

Who could be against any of these things, right? This sort of framing therefore makes those questioning the regulations out to be ogres, or worse, favoring financial skullduggery, rampant pollution, bribery and corruption, and reckless behavior that threatens the entire economy.

But as the old saying goes, the road to hell is paved with good intentions, and that is definitely true of regulation. Regulations often have unintended consequences–many of which are directly contrary to the stated intent. Furthermore, regulations entail costs as well as benefits, and just focusing on the benefits gives a completely warped understanding of the desirability of a regulation.

Take Frankendodd. It is bursting with unintended consequences. Most notably, quite predictably (and predicted here, early and often) the huge increase in regulatory overhead actually favors consolidation in the financial sector, and reinforces the TBTF problem. It also has been devastating to smaller community banks.

DFA also works at cross purposes. Consider the interaction between the leverage ratio, which is intended to insure that banks are sufficiently capitalized, and the clearing mandate, which is intended to reduce systemic risk arising from the derivatives markets. The interpretation of the leverage ratio (notably, treating customer margins held by FCMs as an FCM asset which increases the amount of capital it must hold due to the leverage ratio) makes offering clearing services more expensive. This is exacerbating the marked consolidation among FCMs, which is contrary to the stated purpose of Dodd-Frank. Moreover, it means that some customers will not be able to find clearing firms, or will find using derivatives to manage risk prohibitively expensive. This undermines the ability of the derivatives markets to allocate risk efficiently.

Therefore, to describe regulations by their intentions, rather than their effects, is highly misleading. Many of the effects are unintended, and directly contrary to the explicit intent.

One of the effects of regulation is that they impose costs, both direct and indirect.  A realistic appraisal of regulation requires a thorough evaluation of both benefits and costs. Such evaluations are almost completely lacking in the media coverage, except to cite some industry source complaining about the cost burden. But in the context of most articles, this comes off as special pleading, and therefore suspect.

Unfortunately, much cost benefit analysis–especially that carried out by the regulatory agencies themselves–is a bad joke. Indeed, since the agencies in question often have an institutional or ideological interest in their regulations, their “analyses” should be treated as a form of special pleading of little more reliability than the complaints of the regulated. The proposed position limits regulation provides one good example of this. Costs are defined extremely narrowly, benefits very broadly. Indirect impacts are almost completely ignored.

As another example, Tyler Cowen takes a look into the risible cost benefit analysis behind the Stream Protection Rule, and finds it seriously wanting. Even though he is sympathetic to the goals of the regulation, and even to the largely tacit but very real meta-intent (reducing the use of coal in order to advance  the climate change agenda), he is repelled by the shoddiness of the analysis.

Most agency cost benefit analysis is analogous to asking pupils to grade their own work, and gosh darn it, wouldn’t you know, everybody’s an A student!

This is particularly problematic under Chevron Deference, because courts seldom evaluate the substance of the regulations or the regulators’ analyses. There is no real judicial check and balance on regulators.

The metastasizing regulatory and administrative state is a very real threat to economic prosperity and growth, and to individual freedom. The lazy habit of describing regulations and regulators by their intent, rather than their effects, shields them from the skeptical scrutiny that they deserve, and facilitates this dangerous growth. If the Trump administration and Congress proceed with their stated plans to pare back the Obama administration’s myriad and massive regulatory expansion, this intent-focused coverage will be one of the biggest obstacles that they will face.  The media is the regulators’ most reliable paving contractor  for the highway to hell.

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January 28, 2017

Trump’s Finger Is On the Button!

Filed under: History,Politics,Russia — The Professor @ 12:43 pm

Fearing Trump, the Union of Concerned Scientists has advanced the Doomsday Clock, indicating their belief that the risk of nuclear war has increased. This is actually quite confusing. After all, the Clock has historically waxed and waned based on the perceived (by the pointy heads at the UCS, anyways) threat of a nuclear exchange between the US and the USSR, and since its demise, Russia. So wouldn’t Trump’s supposed softness on Russia and the prospect of a rapprochement between Trump and Putin (which elicits shrieks of horror from the Democrats) reduce the risk of such an event? Shouldn’t the clock have moved backwards, not forwards?

But that’s not the button I refer to in the title. Actually, I should have written buttons, plural, because what I am thinking of is Trump’s pushing of the progressive left’s buttons. We’re only a week into his administration, and already he has pushed so many of their buttons that they are on the brink of psychological collapse–many past the brink, actually.

I could mention several examples, but one stands out even though it is the most symbolic and least substantive of the things he’s done since January 20: the announcement that he will return a portrait of Andrew Jackson to the Oval Office.

Trump’s core constituency is Jacksonian America (as Walter Russell Mead and then I pointed out in 2015), but truth be told, most Jacksonians don’t know a lot about him. Pace Willie Dixon, he’s just one of those Dead Presidents they’d like to get their hands on: “Jackson on a 20 is really great.” But the left does know Jackson, and hates him with a passion: he is one of their bêtes noires. Slaveholder. Ferocious Indian fighter. Author of the Indian Removal Act (a/k/a Trail of Tears). Unabashed American nationalist (heaven forfend!). Further, the left also hates his political heirs: they are the kind of people that an execrable candidate for DNC chair said it would be her job to shut down.

So Trump’s announcement regarding the portrait probably didn’t really make a ripple in his Jacksonian constituency, and that’s not why he did it. But it did unleash an uproar among the progressives–and that’s exactly why he did it. A very deliberate push of a prog button.

Personally, I have considerable ambivalence about Jackson. Much of the criticism is presentism that ignores the historical context: of course men of the 19th century frontier thought and decided differently than those on the Upper West Side for whom Harlem is the frontier. Jackson’s greatest modern biographer, Robert Remini, argues that Jackson believed that removal was the only way to prevent the annihilation of the eastern tribes at the hands of rapacious whites. Others clearly disagree, and believe that Jackson was motivated by bigotry and hatred. The point is that the story is much more complicated than the morality play presented by the left.

Jackson’s economic policy was a very mixed bag. He was in favor of small government, and was the last president to leave the US with no government debt. But his banking policy was disastrous, and was directly responsible for the Panic of 1837.

Politically, of course, he was the avatar of populism and popular democracy. This is is also a mixed bag, but the pluses are bigger and the minuses smaller when the government is small than when it is large.

He was a slaveholder, but an ardent foe of secession, as his actions during the Nullification Crisis showed.

He was also one of the most consistently successful military commanders in US history, beating both Red Coats and . . . Indians (and Spaniards too) in both conventional and unconventional warfare.

But the progressive left is anything but ambivalent about Jackson. To them he is a devil figure, which Trump surely knows–and which is why his portrait will hang in the Oval Office.

As men, Jackson and Trump have myriad differences. Their biographies are obviously utterly different. Where Trump only mused about shooting people in the street, Jackson actually did it. But they have some great similarities, and these will loom large during Trump’s presidency. Both are outsiders who express their disdain for the system and the supposed elite–and the disdain is returned with interest. Neither is constrained by elite convention, and indeed, each takes great glee at sneering at convention and brutally trampling the political establishment. Both rely on advisers who are outside the establishment. Both easily take offense, hold grudges–and take revenge.

It is therefore deeply symbolic that one of Trump’s first acts was to restore Jackson to a place of prominence in the White House. It is pushing the left’s buttons, yes. But he is also signaling how he will act as president. Aggressive–indeed, truculent. In your face. Defiant of the political establishment. Totally unafraid of confrontation and driven to prevail–utterly.

I fully expect that Trump will share other similarities with Jackson. I think that it is likely that his economic policy will be a mixed bag with extremely varied effects: protectionist insanity will sit juxtaposed with a sensible rollback of regulation and the administrative state. Trump will face international issues as president that dwarf anything Jackson had to, but his American nationalism will also lead to very varied effects, as did Jackson’s various foreign engagements (most as a general, rather than president, as in Florida).

And along the way he will push many buttons. But not the nuclear one.

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January 24, 2017

Rosneft & Glencore & QIA & ???: More Kabuki

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 7:58 pm

Today Reuters ran a long article summarizing all of the holes in the official Russian story about the sale of the Rosneft stake. Nice of them to catch up: there is nothing in the article that wasn’t discussed here, or in RBC reports, from six weeks to two weeks ago.

The main question is who is covering the €2.2 billion hole. My leading candidates: (1) a Russian state bank (likely VTB) providing debt financing, or (2) Rosneft buying its own equity from Rosneftgaz (perhaps using funding from a Russian state bank directly, or indirectly via proceeds from its recent bond sale). One factor in favor of (2) is the web of shell companies involved in the deal: these could be used to conceal the faux nature of the “privatization” and the supposed transfer of foreign money to the budget in an amount equal to the announced purchase price. The money could be used to launder Russian money, making it look like it was coming from a foreign source.

Recall that when it was doubted Rosneft would find a foreign buyer, the fallback plan was to have the firm purchase its shares from Rosneftgaz, and then sell them to a foreign buyer later. Option (2) would be a variant on that.

Regardless, even if the details are not known, it is abundantly clear that the privatization was not the clean, blockbuster deal originally announced. It is a stitched up job intended to obscure the failure to make a straight, uncomplicated sale to foreign buyers.

Interestingly, Rosneft has allegedly paid $40 million in legal fees. (H/T @leenur.) In 2017. That’s about $2 million/day, and if the deal was done in 2016, that’s when the legal expenses would be expected to be incurred. This is consistent with this being very much a work in progress. Or maybe, a work in regress.

But the Kabuki play must go on! Sechin is inviting Putin to meet with Glencore, QIA, and Intesa:

The chief executive of Russia’s biggest oil firm Rosneft on Monday asked President Vladimir Putin to receive the company’s partners Glencore, Intesa and the Qatar Investment Authority (QIA), the Kremlin said.

Trading house Glencore and the QIA recently became Rosneft shareholders in a multi-billion-dollar deal partly funded by Italian bank Intesa.

Rosneft boss Igor Sechin said at a meeting with Putin on Monday that Rosneft was planning new projects with the three partners and they wanted to tell Putin about the prospects for those projects, the Kremlin said in a statement on its website.

This is clearly intended to lend Putin’s authority to the deal (as he already did in his end of year Q&A). Bringing in Putin and the alleged principals for a Sovok PR gimmick is pathetic, and amusing–and amusing because it’s so pathetic!

Any such act will not end the questions. It will just bring attention to the deal, and any attention will only bring the questions to the fore.

Not that we can expect to get any answers from the Russians, or from QIA. But why the UK authorities and the LSE seem so complacent about the participation of a UK/LSE-listed company in such a dodgy deal, with such little disclosure, is beyond me. Glencore may argue that it has disclosed the basics of its involvement, but without knowing about the structure of the entire deal it is evaluate the accuracy of those disclosures, in particular relating to what Glencore’s real economic exposure is. The relevant parties in the UK should be pressing hard for much greater disclosure from Glencore.

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Two Contracts With No Future

Filed under: China,Commodities,Derivatives,Economics,Energy,Exchanges,Politics,Regulation — The Professor @ 7:14 pm

Over the past couple of days two major futures exchanges have pulled the plug on contracts. I predicted these outcomes when the contracts were first announced, and the reasons I gave turned out to be the reasons given for the decisions.

First, the CME announced that it is suspending trading in its new cocoa contract, due to lack of volume/liquidity. I analyzed that contract here. This is just another example of failed entry by a futures contract. Not really news.

Second, the Shanghai Futures Exchange has quietly shelved plans to launch a China-based oil contract. When it was first mooted, I expressed extreme skepticism, due mainly to China’s overwhelming tendency to intervene in markets sending the wrong signal–wrong from the government’s perspective that is:

Then the crash happened, and China thrashed around looking for scapegoats, and rounded up the usual suspects: Speculators! And it suspected that the CSI 300 Index and CSI 500 Index futures contracts were the speculators’ weapons of mass destruction of choice. So it labeled trades of bigger than 10 (!) contracts “abnormal”–and we know what happens to people in China who engage in unnatural financial practices! It also increased fees four-fold, and bumped up margin requirements.

The end result? Success! Trading volumes declined 99 percent. You read that right. 99 percent. Speculation problem solved! I’m guessing that the fear of prosecution for financial crimes was by far the biggest contributor to that drop.

. . . .

And the crushing of the CSI300 and CSI500 contracts will impede development of a robust oil futures market. The brutal killing of these contracts will make market participants think twice about entering positions in a new oil futures contract, especially long dated ones (which are an important part of the CME/NYMEX and ICE markets). Who wants to get into a position in a market that may be all but shut down when the market sends the wrong message? This could be the ultimate roach motel: traders can check in, but they can’t check out. Or the Chinese equivalent of Hotel California: traders can check in, but they can never leave. So traders will be reluctant to check in in the first place. Ironically, moreover, this will encourage the in-and-out day trading that the Chinese authorities say that they condemn: you can’t get stuck in a position if you don’t hold a position.

In other words, China has a choice. It can choose to allow markets to operate in fair economic weather or foul, and thereby encourage the growth of robust contracts in oil or equities. Or it can choose to squash markets during economic storms, and impede their development even in good times.

I do not see how, given the absence of the rule of law and the just-demonstrated willingness to intervene ruthlessly, that China can credibly commit to a policy of non-intervention going forward. And because of this, it will stunt the development of its financial markets, and its economic growth. Unfettered power and control have a price. [Emphasis added.]

And that’s exactly what has happened. Per Reuters’ Clyde Russell:

The quiet demise of China’s plans to launch a new crude oil futures contract shows the innate conflict of wanting the financial clout that comes with being the world’s biggest commodity buyer, but also seeking to control the market.

. . . .

The main issues were concerns by international players about trading in yuan, given issues surrounding convertibility back to dollars, and also the risks associated with regulation in China.

The authorities in Beijing have established a track record of clamping down on commodity trading when they feel the market pricing is driven by speculation and has become divorced from supply and demand fundamentals.

On several occasions last year, the authorities took steps to crack down on trading in then hot commodities such as iron ore, steel and coal.

While these measures did have some success in cooling markets, they are generally anathema to international traders, who prefer to accept the risk of rapid reversals in order to enjoy the benefits of strong rallies.

It’s likely that while the INE could design a crude futures contract that would on paper tick all the right boxes, it would battle to overcome the trust deficit that exists between the global financial community and China.

What international banks and trading houses will want to see before they throw their weight behind a new futures contract is evidence that Beijing won’t interfere in the market to achieve outcomes in line with its policy goals.

It will be hard, but not impossible, to guarantee this, with the most plausible solution being the establishment of some sort of free trade zone in which the futures contract could be legally housed.

Don’t hold your breath.

It is also quite interesting to contemplate this after all the slobbering over Xi’s Davos speech. China is protectionist and has an overwhelming predilection to intervene in markets when they don’t give the outcomes desired by the government/Party. It is not going to be a leader in openness and markets. Anybody whose obsession with Trump leads them to ignore this fundamental fact is truly a moron.

 

 

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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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