Streetwise Professor

October 12, 2017

Trump Treasury Channels SWP

SWP doesn’t work for the Trump Treasury Department, and is in fact neuralgic to the idea of working for any government agency. Yet the Treasury’s recent report on financial regulatory reform is very congenial to my thinking, on derivatives related issues anyways. (I haven’t delved into the other portions.)

A few of the greatest hits.

Position limits. The Report expresses skepticism about the existence of “excessive speculation.” Therefore, it recommends limiting the role of position limits to reducing manipulation during the delivery period. Along those lines, it recommends spot month on limits, because that is “where the risk of manipulation is greatest.” It also says that limits should be designed so as to not burden unduly hedgers. I made both of these points in my 2011 comment letter on position limits, and in the paper submitted in conjunction with ISDA’s comment letter in 2014. They are also reflected in the report on the deliberations of the Energy and Environmental Markets Advisory Committee that I penned (to accurately represent the consensus of the Committee) in 2016–much to Lizzie Warren’s chagrin.

The one problematic recommendation is that spot month position limits be based on “holistic” definitions of deliverable supply–e.g., the world gold market. This could have extremely mischievous effects in manipulation litigation: such expansive and economically illogical notions of deliverable supplies in CFTC decisions like Cox & Frey make it difficult to prosecute corners and squeezes.

CFTC-SEC Merger. I have ridiculed this idea for literally decades–starting when I was yet but a babe in arms 😉 It is a hardy perennial in DC, which I have called a solution in search of a problem. (I think I used the same language in regards to position limits–this is apparently a common thing in DC.) The Treasury thinks little of the idea either, and recommends against it.

SEFs. I called the SEF mandate “the worst of Frankendodd” immediately upon the passage of the law in July, 2010. The Treasury Report identifies many of the flaws I did, and recommends a much less restrictive requirement than GiGi imposed in the CFTC SEF rules. I also called out the Made Available For Trade rule the dumbest part of the worst of Frankendodd, and Treasury recommends eliminating these flaws as well. Finally, four years ago I blogged about the insanity of the dueling footnotes, and Treasury recommends “clarifying or eliminating” footnote 88, which threatened to greatly expand the scope of the SEF mandate.

CCPs. Although it does not address the main concern I have about the clearing mandate, Treasury does note that many issues regarding systemic risks relating to CCPs remain unresolved. I’ve been on about this since before DFA was passed, warning that the supposed solution to systemic risk originating in derivatives markets created its own risks.

Uncleared swap margin. I’ve written that uncleared swap margin rules were too rigid and posed risks. I have specifically written about the 10-day margining period rule as being too crude and poorly calibrated to risk: Treasury agrees. Similarly, it argues for easing affiliate margin rules, reducing the rigidity of the timing of margin payments (which will ease liquidity burdens), and overbroad application of the rule to include entities that do not impose systemic risks.

De minimis threshold for swap dealers. I’m on the record for saying using a notional amount to determine the de minimis threshold to determine who must register as a swap dealer made no sense, given the wide variation in riskiness of different swaps of the same notional value. I also am on the record that the $8 billion threshold sweeps in firms that do not pose systemic risks, and that a reduced threshold of $3 billion would be even more ridiculously over inclusive. Treasury largely agrees.

The impact of capital rules on clearing. One concern I’ve raised is that various capital rules, in particular those that include initial margin amounts in determining liquidity ratios for banks, and hence their capital requirements, make no economic sense, and and unnecessarily drive up the costs banks/FCMs incur to clear for clients. This is contrary to the purpose of clearing mandates, and moreover, has contributed to increased concentration among FCMs, which is in itself a systemic risk. Treasury recommends “the deduction of initial margin for centrally cleared derivatives from the SLR denominator.” Hear, hear.

I could go into more detail, but these are the biggies. All of these recommendations are very sensible, and with the one exception noted above, in the Title VII-related section I see no non-sensical recommendations. This is actually a very thoughtful piece of work that if followed, will  undo some of the most gratuitously burdensome parts of Frankendodd, and the Gensler CFTC’s embodiment (or attempts to embody) those parts in rules.

But, of course, on the Lizzie Warren left and in the chin pulling mainstream media, the report is viewed as a call to gut essential regulations. Gutting stupid is actually a good idea, and that’s what this report proposes. Alas, Lizzie et al are incapable of even conceiving that regulations could possibly be stupid.

Hamstrung by inane Russia investigations and a recalcitrant (and largely gutless and incompetent) Republican House and Senate, the Trump administration has accomplished basically zero on the legislative front. It’s only real achievement so far is to start–and just to start–the rationalization and in some cases termination (with extreme prejudice) of Obama-era regulation. If implemented, the recommendations in the Treasury Report (at least insofar as Title VII of DFA is concerned), would represent a real achievement. (As would rollbacks or elimination of the Clean Power Plan, Net Neutrality, and other 2009-2016 inanity.)

But of course this will require painstaking efforts by regulatory agencies, and will have to be accomplished in the face of an unrelentingly hostile media and the lawfare efforts of the regulatory class. But at least the administration has laid out a cogent plan of action, and is getting people in place who are dedicated to put that plan into action (e.g., Chris Giancarlo at CFTC). So let’s get on with it.

 

 

 

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October 9, 2017

The Thaler Nobel: A Nudge to Progressivism in a Populist Age

Filed under: Economics,Politics — The Professor @ 9:02 pm

Richard Thaler won the 2017 economics Nobel. Another win for Chicago. Ironic, in a way, given that in many ways Thaler is the anti-Chicago. The fact that the prime critic of homo economicus is on the faculty of the school most associated with neoclassical economics that utilizes homo economicus as its primary analytic engine is an indication of Chicago’s self-confidence, and reflects a belief that intellectual tension is a spur to scholarly innovation. Also, it may well indicate a canny instinct about future trends in economic science.

Insofar as the Nobel is a measure of impact, this one is warranted: there is no doubt that behavioral economics, of which Thaler is the recognized leader, has had an impact on the profession. That said, this area was recently recognized with Kahneman’s Nobel a few years back, and it would have been preferable IMO to have awarded Thaler along with Kahneman.

Insofar as the substance of behavioral economics is concerned, I largely agree with Mario Rizzo’s opinions on the Thaler award. Along with Rizzo, I find it useful to divide things into positive and normative economics.

With respect to positive economics, as Rizzo notes the primary use of the rational actor assumption is to derive predictions about aggregate/market behavior. It is not at all evident how the irrational actor assumption leads to more empirically robust models.  I vividly recall Gary Becker’s discussion of irrationality in an Econ 301 class at Chicago, in which he showed that rationality (in the form of utility maximization) is not necessary to derive the law of demand (though it is sufficient). Random choices on the budget line lead to a downward sloping demand curve, meaning that the location of the opportunity set, rather than how agents choose a point on that budget set, is the more important factor in causing the demand curve to slope down.

Indeed, there is a danger of falling prey to the fallacy of composition: even if certain behaviors are observed at the level of the individual does not imply that they will characterize behavior at larger elements of aggregation. Allowing for individual irrationality certainly adds modeling degrees of freedom, but that’s more of a bug than a feature, especially given the now vast number of alleged behavioral biases. There is always the risk of cherry picking this bias or that to explain a particular phenomenon, and then cherry picking another (which could be completely at odds with the first one) to explain another. This creates the risk that behavioral economics is empirically vacuous.

Further, there are already plenty of degrees of freedom even within the standard economics maximizing agent framework. Information environment–note that the most die-hard advocate of neoclassical economics and the exemplar of the Chicago School, introduced costly information in the form of search costs to explain price dispersion, which is inexplicable in the Marshallian costless information, perfect competition framework. Preferences–which raises a question: is habit persistence rational or irrational? Strategic interaction–one of the problems with game theory is that virtually any outcome is possible with rational actors depending on the details of the game, the information environment, beliefs, etc. Many phenomenon that seemed anomalous in one type of model with rational actors have been explained by tweaking one of these features all the while retaining the rational actor assumption.

So I’ve yet to see how deviating from the maximizing agent framework (and maximization is really what rationality means) improves the ability of economics to improve the empirical performance of its predictions regarding aggregate/market behavior. Meaning that the contributions of behavioral economics to positive economics are dubious, in the sense that they are unnecessary, and often subject to abuse.

But what really distinguishes behavioral economics is its avowedly normative thrust. People are irrational, and would be better off in objectively measurable ways if these behavioral biases were corrected. Furthermore, many behavioral economists, and Thaler specifically, are quite confident in their ability to identify and correct these biases–and make people better off–through “nudges”.

I have two major objections to this. The first is the fallacy of composition problem mentioned earlier. Nudged agents interact in markets, organizations, and institutions. Individual behavioral changes will lead to changes in prices and market outcomes. It does not follow that “better” individual behavior will result in “better” market outcomes–that’s the fallacy of composition in action. Economies are emergent orders, and small changes in individual behavior can lead to very different emergent outcomes. The law of unintended consequences is ruthless in its operation in emergent settings.

My second objection is more straightforward. Behavioral economics of the nudge variety is relentlessly progressive, in the political sense. There are the elite nudgers, and the irrational hoi polloi who can be improved by the beneficent interventions of the nudgers. Moreover, the elite are apparently not just benevolent, but also devoid of their own behavioral biases.

To which I reply: one of the major biases identified by behavioral economists is the overconfidence bias. Mightn’t the nudgers be particularly prone to that bias? The likely commission of the fallacy of composition suggests that they are. As does the dreary experience of social and behavioral engineering efforts large and small, where technocratic elites in their overweening confidence wreaked great havoc around the world.

Ironically, I would assert that behavioral economics actually feeds the overconfidence bias among its practitioners. A seemingly powerful intellectual tool has the tendency to do that. In economics, I would proffer Keynesianism as an example.

Shall we consider other biases as well? Given that there are many of them, we could be here for a while. Suffice it to say that once you admit the nudgers are themselves imperfect decision makers, the case for nudging becomes very weak indeed. When you add the fact that even Spock-like nudgers operate with seriously limited information (about outcomes of emergent social processes in particular), the case becomes weaker still.

Behavioral economics therefore is just what a would-be technocratic elite ordered. It provides a justification for their existence, and also for an existence that should be independent of check by popular institutions. For it would be irrational, wouldn’t it, to subject rational, bias-free technocrats to the whims of irrational individuals crippled by various behavioral biases? Decision making elites unconstrained by popular forces is the essence of progressivism (and in its extreme form, totalitarianism).

Behavioral economics is particularly precious to the elite in this populist age when technocratic elites are under attack from the hoi polloi. The Nobel committees are notoriously political, and often make political statements through their choices. I would not be surprised if the Thaler award has a strong political undercurrent, given the palpable elite panic at resurgent populism, and the decidedly elitist, progressive thrust of behavioral economics generally, and its Thaler-inspired nudge variety in particular.

Behavioral economics is very congenial to top-down approaches to social problems. It is viewed by deep skepticism with people like me who believe that the knowledge problem; emergence and the law of unintended consequences; and the deforming effects and perverse incentives of power (to name just three things) make top down solutions disastrous in most cases.

So the Thaler Nobel is accurately reflective of the influence of behavioral economics on the profession, and on the profession’s contribution to policy debates. And that is a disturbing reality.

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October 6, 2017

Las Vegas, the Liberty-Gun Nexus, and Gun Control

Filed under: Guns,Politics — The Professor @ 11:21 pm

The horrific massacre in Las Vegas has, predictably, led to calls for greater gun control. Or “common sense gun control” as the no-doubt-focus-group-tested Democratic/liberal mantra puts it.

But here’s the thing. Gun control measures (even up to attempted confiscation) will have the least impact on mass shootings a la Las Vegas or Virginia Tech or Aurora or Sandy Hook. Restrictions on guns (like restrictions on drugs, or alcohol) don’t make these things disappear: they raise the cost of acquiring them. The higher cost indeed induces some people not to buy them: but these people are the marginal demanders, those who get relatively low value from them. In contrast, someone like Stephen Craig Paddock is way inside the margin. The likes of him are about as infra-marginal as you get.

Paddock acquired a large number of weapons and a large amount of ammunition. He rented an expensive condominium as his sniper’s nest. He made elaborate plans. He clearly spent lots of time, effort, and money to carry out his twisted plans. Raising the cost or difficulty of obtaining firearms substantially –and far more than the “common sense gun control measures” would– would not have deterred him from his evil plot. He obviously had a high willingness to pay, and an ability to pay.

But there is a perceived need to do something, and hence much time and breath is wasted obsessing on what are in reality trivial details. In the Las Vegas shooting, the focus is on “bump stocks” which allow a shooter to increase the rate of fire of a semi-automatic weapon to near automatic weapon levels: Paddock had such stocks on several of his weapons.

Well, particularly for the kind of shooting that Paddock was doing, it is doubtful that the bump stock (or even a fully automatic weapon) increased his lethality, and quite possibly reduced it. Automatic fire from a non-crew served weapon is notoriously inaccurate: it isn’t referred to as spray and pray for nothing. Although the first models of the M-16 had a fully automatic selection, later models eliminated it. This was in large part due to the fact that the military learned that aimed single-shot fire is more accurate and more deadly than rocking and rolling on full auto.

In Iraq and Afghanistan, it is easy to distinguish fire from American troops from that of jihadis: the Americans fire single rounds, the jihadis blaze away on automatic. Those fighting Americans often find this disconcerting, in part because it communicates discipline and control and training. This can be unnerving. In contrast, firing on automatic often mainly provides a psychological boost to a shaky amateur, or serves to keep an enemy’s head down while other elements of a fire team maneuver to close with the enemy.

Automatic fire–and bump stock quasi-automatic fire–also increases the risks of jamming. Apparently several of Paddock’s weapons were found jammed.

So ban bump stocks, but realize that it is a ritualistic act not one that will make would-be mass shooters less lethal.

Other proposals are even more asinine. Hillary–you’re shocked, I’m sure–was first to the post in asininity, tweeting that just think how much worse things would have been if Paddock’s weapons been equipped with “silencers” (currently heavily regulated, but which some Republicans have proposed making easier to obtain). After all, if his guns been “silenced,” the no one would have heard the shooting and Paddock would have had more stationary targets!

Nice of Hillary to attempt to score political points against Republicans while the bodies were still warm.

Where to begin? This is stupid beyond words. Many have pointed out that even a suppressor (a more accurate term than “silencer”) merely reduces the noise caused by the explosive release of gases from the muzzle of a weapon when it is fired. But that’s not even the most ludicrous thing. A high powered rifle firing a standard cartridge shoots bullets traveling faster than the speed of sound. So the bullet creates a sonic boom–heard as a cracking sound: a suppressor does nothing to reduce the intensity of this sound. A suppressed gun still makes a big noise. Further, downrange, the bullet is still moving through the air, and creates a ripping sound as it passes. Which means that if you are downrange you will hear the bullet passing by before you hear the report of the weapon.

Suppressors can reduce the sound of pistols noticeably–because they fire subsonic rounds. But you ain’t going to shoot people 1000+ feet away with a pistol.  Similarly, if you fire special subsonic ammunition from a suppressed rifle, the report can be substantially reduced. But again, because of the lower power of these rounds, you won’t hit anything beyond 70 yards or so (i.e., smoothbore musket range). (US special operators have sought subsonic rounds for use on raids to enhance stealth, but they would be using this ammunition at close quarters.)

Here are a few videos that illustrate these points. Note to Hillary: 30 seconds on YouTube are all that you’d need to find this information, and loads more. But why let facts get in the way of a good narrative to score some political points, right?

So every one of Paddock’s weapons could have had a suppressor, and it wouldn’t have made a damn bit of difference. (I’d also note that because he was firing in an urban environment with lots of hard surfaces at various angles, the sound would have bounced around so much that pinpointing his location based on sound would have been nearly impossible.)

This all means that the “common sense” gun control proposals are totally senseless, if the goal is to reduce, let alone eliminate, mass shootings, or to reduce the lethality of people like Stephen Paddock.

Thus, more draconian measures–likely including mass confiscation–would be required. And this is something that a large majority of Americans have made it clear that they will not condone. In essence, for most Americans, periodic mass shooting is something that they are willing to accept in order to retain their ready access to guns of pretty much all types.

This the American left, and most of the rest of the world, finds utterly inexplicable, and downright horrifying. The defiant embrace of firearms by a large portion of the American populace, and the tolerance of this embrace by another large portion, is shocking to them.

The embrace, and the understanding even by many of those who do not embrace, reflects the strong connection in the American mind between ownership of guns and individual liberty. In Europe, long before the US was formed, bearing arms was emblematic of autonomy and status. That connection was even more pronounced in America. Free men can bear arms: slaves, serfs, and the otherwise subservient cannot.

An expression, of which there are several variants, expresses this: “God made men, Samuel Colt made them equal.” (The Colt website, perhaps respecting religious sensitivities, has it “Abraham Lincoln freed all men, but Samuel Colt made them equal.”) When armed, in other words, I am equal before all men. Since, as de Tocqueville noted, liberty and equality are paramount to Americans to a degree unparalleled in the rest of the world, restrictions on firearms are deemed a dangerous encroachment on fundamental freedom. It’s not just about guns qua guns. It’s about what guns mean for freedom.

In the American mind, the right to bear arms is fundamental precisely because it is viewed as the thing that makes Americans a uniquely free people: the very horror with which other nationalities view American gun culture in fact reinforces the American attachment. This demonstrates the uniquely robust nature of American freedoms, as opposed to those enjoyed by the citizens of other nations. Similarly, the fact that gun sales actually tend to increase in the aftermath of mass shootings is likely due to a belief that it is at precisely these times that this symbolically potent liberty will be restrained.

Law abiding gun owners are also deeply incensed, and take it quite personally, when their responsible possession of guns is threatened as a means of reducing murder or suicide or even mass shootings because this lumps them with street thugs, drug dealers, the emotionally troubled, and the psychopathic.

Thus, the left is actually acting against its own policy preferences when it ratchets up the rhetoric in the aftermath of a Las Vegas or a Sandy Hook. That rhetoric triggers (yes, pun intended) a passionate reaction against additional controls on guns because many perceive this to be a blow against personal freedom generally, and an attack on their characters.

It is fascinating to note that American support for gun control–any gun control, including measures far less draconian than in place in most of the rest of the world–has decreased in recent decades. I don’t think this is accidental. This has also been a period of increased government power, and increasing encroachments of the state on individual liberty. My argument about the liberty-gun connection predicts exactly such a relationship. Similarly, in the United States, those who are most supportive of an expansive government are most supportive of gun control: those most hostile to or suspicious of the government are most opposed.

To which a good German (or a good liberal) is likely to reply: but look at the carnage that such a sentimental attachment to liberty–and guns-causes! Well, when I look at the carnage that good German subservience to the state causes (world wars, mass murder), I know which is the much lesser of two evils.

By its nature, America always attracted the most independent, most rebellious, and most recalcitrant of the people of Europe. They were attracted by the greater personal liberty, and this in turn generated a kind of turbulence that was and is the source of great creativity and energy, but which had as one of its downsides a greater propensity for personal violence. Life is about trade-offs, and this is a fundamental trade off that has characterized America since even before its founding as a nation.

Thus, to many Americans, guns and liberty are a package deal: you can have both, or you can have neither. Yes, like all things, guns have their cost. But despite this cost, to many the package of both is still vastly preferable, given the value of liberty.

You may find this incomprehensible. You may find this stupid. You may even find this evil. I don’t, but I understand there are those who do. But I believe it is a reality, and in a democracy, you have to deal with the people as they are. And a lot of people–perhaps not a majority, but a strong minority at least–believe in the package deal. Those who do, believe in it passionately, intensely. So if progressives want to change fundamentally the laws on guns, they have to change fundamentally the people–or act in highly undemocratic ways.

The left is of course totally cool with trying to change the people: it is one of their abiding passions. They are also not averse to undemocratic means to achieve their objectives–that was understatement there, folks. But ironically, the harder they push, the greater the pushback. The Trump presidency is probably the most notable result of that pushback.

This is why even horrors like Las Vegas do not lead to major shifts in public opinion, and if anything, lead to a hardening of that opinion. In the United States, for deep historical and cultural reasons, there is a strong nexus between personal liberty and firearms. A threat to the latter is deemed a threat to the former. And since personal liberty is so fundamental to many Americans, a threat to the former is an existential one, or close to it. This is not conducive to compromise: to the contrary.  So the not-so-passionate-about-liberty left will push, and the passionate-about-liberty non-left will push back, leaving us in exactly the same place, but only more hostile and bitter in our division.

 

 

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October 4, 2017

The Identity Politics Left is Now Devouring the Traditional Left That Fed It

Filed under: Politics — The Professor @ 7:43 pm

It is a common for conservatives to be shouted down–or rioted down–on college campuses. But we are now seeing that traditional rights-liberals are also under threat. The ideal of free speech is rejected by the identity politics left as being a form of oppression, a cover behind which whites (and especially white, heterosexual, males) exercise dominance over marginalized groups.

Case in point: on Monday, a speaker from the ACLU who had intended to speak on “Students and the First Amendment” was shut down by Black Lives Matter protestors at William & Mary University:

It was the last remark she was able to make before protesters drowned her out with cries of, “ACLU, you protect Hitler, too.” They also chanted, “the oppressed are not impressed,” “shame, shame, shame, shame,” (an ode to the Faith Militant’s treatment of Cersei Lannister in Game of Thrones, though why anyone would want to be associated with the religious fanatics in that particular conflict is beyond me), “blood on your hands,” “the revolution will not uphold the Constitution,” and, uh, “liberalism is white supremacy.”

Liberalism is white supremacy. Got that? In other words, the ACLU are the new Nazis, the new Klan. For all of you who are petrified at the thought of being called racist, see what little space you now have to operate in: it’s kowtow to the identity politics left of which BLM is an exemplar, or be considered no different than Bull Connor.

On the one hand this is deeply disturbing. On the other, it is quite clarifying, and I hope (but doubt) that it will get traditional liberals to open their eyes to the monster they have unleashed. For the traditional left (the New Deal, Great Society, civil libertarian left) has fed the identity politics beast that is now devouring them.

They were warned, early and often, but they ignored. Why? Partly out of naivety, I’d guess. But that’s the most charitable explanation. Less creditable, but more important explanations include: (1) “no enemies on the left,” (2) a cynical political calculation that identity politics were a useful battering ram in their battle against conservatives, classical liberals, and libertarians, and (3) a long-ago category error that the best way to achieve equal rights for minorities was to grant them special rights based on their race, origin, sexual orientation, or gender. Underlying all this was–is–the belief that America is a fundamentally flawed society and polity founded on racism and class oppression. BLM and Antifa and the like are the inevitable consequence of that belief.

Will this be the traditional left’s come to Jesus moment? I doubt it. They are too far down the road to turn back. Perhaps they will try to go AWOL, but their inveterate hatred of the right and their fear of the more militant on their left will in the end, I fear, lead them to fall in behind the revolutionary vanguards of identity politics. College administrators are already doing that, and I think they are just a leading indicator of how the broader left will behave. This does not bode well for politics, or for civil society, in America’s future.

 

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September 25, 2017

Whoops, They Did It Again! After the German Election, the Establishment is 0-for-3.

Filed under: Energy,Politics,Russia — The Professor @ 11:36 am

I am experiencing considerable–what’s that word? oh yes!, schadenfreude–at the German election results. Although Angela Merkel’s party received the largest share of the vote, the results were a shocking setback for her. The CDU/CSU won the largest share of the vote, but this share was the lowest since WWII and represented a double-digit drop from the 2013 vote. Further, the CSU’s leader is mooting a split from the CDU. Merkel is almost certain to have to craft a coalition including three other parties–including the Greens–and this will be time consuming and constrain her power even once the coalition is in place. But the biggest setback at all was due to the stunning surge of Alternative for Deutschland (AfD), the nationalist (and typically referred to as “far right”) party, which not only surpassed the 5 percent hurdle for parliamentary representation, but garnered 13 percent of the vote.

On Friday, Merkel was lionized. Now she is a greatly diminished figure. So much for the New Leader of the Western World, the Tamer of Trump, the Vanquisher of Populism.

And it’s not like this should be surprising. This is at least the third major replay of the movie–first Brexit, then Trump, now Merkel/AfD. Like the Remainers and the Democrats, Merkel condescended to the broad strain of popular (and populist) unease at her policies, most notably her immigration policy. Indeed, she and the rest of “elite” German (and indeed, Western) opinion could barely contain their disdain, and indeed revulsion, at any of the hoi polloi who dared question the wisdom of admitting a million plus immigrants from Muslim countries, or who expressed so much as concern at the criminality (especially sex crimes) and terrorism risk associated with the immigration wave: such people were the German version of The Deplorables. To the contrary: Merkel et al used this criticism as an opportunity to engage in a spasm of virtue signalling, not to say moralistic onanism. Those who agreed with them were morally elevated: those who disagreed, or even questioned, were knuckle dragging crypto–or not so crypto–fascists.

And as in the UK and the US, the knuckle draggers had the vote–and used it to take their revenge.

It is hard to discern from biased media coverage just what AfD really is. Perhaps David Goldman (AKA Spengler) is right that it is “an America-hating ethnic nationalist monster crawling with Nazi nostalgia.” I seriously doubt, however, that most of those who voted for it fit that description. But in some ways the party’s alleged ugliness, and the scorn and derision heaped on it by Merkel and the establishment, were a feature and not a bug to those looking to express opposition to the establishment’s policies. In a parliamentary system, voting for a fringe party is a way of sending a message, and what better way to send a message to Angela et al than by voting for a party that makes them recoil in horror because of its often extreme views? The only way to snap them out of their virtue signaling and self-pleasuring reveries is a 2×4 upside the head: voting for an AfD that elite opinion considered beyond the pale did just that. For that purpose, the more reprehensible the party, the better.

Such a smack may be necessary, but it may not prove sufficient. For what the post-Brexit and post-Trump reactions of the elite demonstrate is that they are incapable of reconsideration or self-examination or self-doubt. They are so convinced of their own superiority (especially moral superiority) that they tend to double down on the derision and condescension. Thus, electoral shocks tend to be merely the first battle in a protracted and increasingly hysterical war between the soi disant elite and those they believe it is their right to rule. We see that in the US today, with no respites even on the Sabbath, as the current frenzy over the NFL demonstrates.

My schadenfreude is only increased by the fact that Germany lapped France  as the most annoying country in Europe some time ago. German annoyingness was the product of two currents, one of which is longstanding, the other more recent. The longstanding current is that of various German national neuroses, most notably the need to cope with the awesome responsibility for the greatest catastrophes of the 20th century, the two World Wars, and in particular the crimes committed in the second of these. To prove that they are different now, the Germans have long held themselves out as morally superior judges of everyone else. Notable examples include virulent German criticism of Israel (especially useful because if Israelis are no better than Nazis, the moral valence of the Holocaust is diminished) and of the US in Vietnam, and latterly Iraq. German criticism of lazy southern Europeans is a somewhat less egregious, but nonetheless notable, example of this tendency. Virtue signaling is a natural pastime.

The second current is Germany’s economic ascendance, especially in the context of the EU. Germany emerged from the Financial Crisis as the dominant economy in Europe, by far. Its main rival within the EU, France, fared not nearly so well, and this combined with British exit has left Germany preeminent in the EU. And they have not been shy to exercise this dominance–nor should they have been expected to, given the aforementioned belief in their moral superiority. Germany–with Merkel in the lead–has been the biggest force pushing for MOAR Europe, because in their current circumstances, More Europe means More German Power.

Of particular relevance in light of the election results, one of the most appalling manifestations of this has been Germany’s insistence on imposing its open borders policy on other countries, especially in eastern Europe (notably Poland). For its part, the Polish government knows how to hit Germany where it hurts (in its swollen sense of superiority) by threatening to demand trillions in reparations for WWII. (The issue of WWII illustrates Churchill’s aphorism about the Germans being either “at your throat or at your feet” very well. It is interesting to note how the Germans have been at times groveling to the Russians in recognizing their depredations in Russia during WWII, but have not behaved similarly to Poland, even though German crimes there were probably greater, and Polish responsibility for the war far less than Russia’s.)

German energy policy is another example. The Germans have been intent on forcing Nordstream I and now II on Europe because it benefits Germany, even though it leaves eastern Europe in the Russian energy thrall. Related to this is the schizophrenic German policy on Russia. On the one hand it has insisted on maintaining sanctions on Russia for Ukraine, but on the other hand it freaked out when the US tightened sanctions on Russia because this undermined German attempts to secure gas supplies from the Russians.  The Germans insist on sending a signal–as long as they don’t have to pay a price.

So even if–or especially if–AfD is as bad as Spengler says, its shockingly strong performance yesterday will have major political effects outside of the borders of Germany. It has proven that Merkel has feet of clay. It will lead to a protracted negotiation over a coalition that in the end will leave Merkel diminished and constrained. It will probably spark a vicious political battle in Germany over immigration and Europe that will derail Germany’s attempt at world domination by other means.

And as much as the western establishments will wail, these are good things. In fact, the wailing is probably the best indication of that which one could imagine.

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September 22, 2017

The Mueller Investigation: One Part Abuse, One Part Absurdity. There is No Third Part.

Filed under: Politics,Russia — The Professor @ 7:32 pm

The Mueller “investigation” of “collusion with Russia” is one part abuse, one part absurdity. There is no third part.

One aspect of the abuse is well summarized by my friend Tom Kirkendall and others quoted in this article:

“Here is a United States citizen where the FBI is coming in, picking his lock, and raiding his home in the early morning, over what? It doesn’t matter which side you’re on. It’s just crazy. We’re not the Soviet Union. It’s appalling,” said Kirkendall, who has worked on cases involving one of the special counsel’s key investigators, Andrew Weissmann.

As Tom noted to me, apparently the irony of using KGB tactics to investigate rumored Russian intelligence involvement in the US election is lost on Mueller and his thugs. The presence of serial prosecutorial abuser Andrew Weissmann is also quite revealing about Mueller’s attitude.

Another aspect of the abuse is the continued and repeated leaking from the investigation, and about Manafort in particular. The leaked information was obtained either by search warrant in a criminal investigation, or a FISA warrant in an intelligence investigation: it is criminal to release either.

All of this is clearly intended to intimidate Manafort into cooperation against Trump. In this effort, they are apparently ranging far afield from anything remotely related to the 2016 election. One (leaked) story is that they are looking into Manafort’s activities dating back 11 years. That might have more relevance to the 2008 election involving current Swamp darling John McCain–Manafort’s partner Rick Davis was McCain’s 2008 National Campaign Manager–than it does 2016’s.

No leaks yet as to whether Mueller is investigating contacts between Manafort and Agamemnon during the Trojan War. Which would be about as relevant to the things he is pursuing now.

Another leak is that–gasp!–Manafort offered to brief Oleg Deripaska about the campaign. I checked my thesaurus. “Brief” and “collude” or “conspire” are NOT synonyms. Furthermore, this is an example of how dishonest and misleading leaks can be. In court they make you swear to tell the whole truth, because partial revelations can be as misleading and deceptive as an outright lie. How many other people from what other nations did Manafort offer to brief? What did these briefings involve? Just revealing a single communication about a possible Russia contact (without even confirming that any briefing actually occurred) is highly manipulative, and presents a distorted picture of what actually occurred.

It is telling that Manafort has demanded that ALL of the material collected about him be released. He no doubt knows that the Deripaska connection would appear trivial when put into the context of the entirety of his activities.

I wonder if they have the measure of their man, however. After all, the whole reason Manafort has come under suspicion is his history of dealings in Ukraine, and on the side of Russia-friendly politicians there. These people are not boy scouts. They are capable of far worse things than no-knock raids. Someone like Manafort who is used to dealing with the likes of Yanukovych and Ukrainian oligarchs cannot be easily intimidated. I’m not saying he’ll go all G. Gordon Liddy, but he’s not likely to collapse into a puddle of tears begging for Mueller’s mercy either.

One last thing about this: the massive leaks give Manafort a colorable claim that he cannot receive a fair trial anywhere in the US due to the highly prejudicial pre-trial (and even pre-indictment) publicity. Mueller et al have to know this, but are willing to leak prejudicially anyways, meaning they don’t give a damn about Manafort qua Manafort. But Manafort (and his attorneys) know this too–which might lead him to resist the pressure.

As for absurdity, it is widely reported that a major focus of Mueller’s investigation is the alleged purchase by Russians (which of the 145 million odd citizens of the Russian Federation has not been revealed) of a piddling sum of ads on Facebook. What connection this has to the collusion allegations that started this whole effort in motion has not been disclosed. But even if there is some remote connection, this is farcical.

The purchase price of the ads was between $50,000 and $100,000. (I have seen both numbers quoted.) To put things in perspective, Hillary spent $400 freaking million on ads. (And every dollar was wasted–hahahaha!) So even assuming the high number, the FB ads represented .025 percent of Hillary’s ad buy: Hillary was spending more per business hour than the entire FB ad buy. This does not count the massive free publicity via the mainstream media, which was highly partisan: that would have cost many billions to buy. Nor does it count pro-Hillary Facebook and Twitter (and for all I know, Instagram) material that was churned out during 2016.

Given that Mueller has hired 14 high-powered lawyers, who always come with a train of support staff, I would not be surprised if he spends more in a day investigating the Great Facebook Conspiracy than the conspirators spent on the ads in the first place.

All of which shows beyond cavil that any putative Russian ad buy on Facebook was about as relevant to the outcome of the election as what Putin had for breakfast on election day. Or put differently, if it did have any impact on the election, every campaign manager and consultant is an idiot and a wastrel for spending vast sums on conventional media buys when spending the campaign budget for a hotly contested school board race on Facebook ads would be sufficient to propel their candidates to the highest offices in the land.

Both the abuse and the absurdity demonstrate the depravity of the independent counsel statute, and the grave disservice that Rod Rosenstein and Jeff Sessions did not just to Trump but to the nation, by appointing Mueller, and in particular, appointing him with a license to look into anything remotely related to Russia. Prosecutorial power must be restrained, or it will be abused: not may be–will be. (This is especially true with US prosecutors.) The most important constraint is that they be limited to prosecuting a specific allegation of criminality. Indeed, given the stakes and the huge ramifications for the operation of the US government, special prosecutors should be particularly constrained. Instead, we are in a situation where this special prosecutor is apparently free of any limitation, and is free to roam at will as a hybrid of Inspector Javert and Frankenstein’s Monster.

The only silver lining in this dark cloud is that the fact that Mueller is chasing chimeras likely means that there is nothing to the collusion allegations that were the reason for his appointment.

The reason I started to write about Russia years ago was that it represented to me a real world dystopia that showed what could happen in the absence of a rule of law, and protections of individual rights: writing about a place where these things did not exist was (to me) an effective way of demonstrating their importance where they do exist. But in the 11 odd years since I started blogging about Russia, the United States has been converging to it from above, and the pace of convergence has quickened in recent years. It is sickly ironic that one of the most disturbing illustrations of this convergence is a special counsel investigation ostensibly motivated by grave concerns about Russian interference in American politics. Pace Pogo, we have met the enemy, and he is us: we are doing a damn good job at becoming Russia all by ourselves, thank you very much.

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September 20, 2017

Remember Chickamauga!

Filed under: Civil War — The Professor @ 5:28 pm

The Battle of Chickamauga took place on 19-20 September, 1863, making today (and yesterday) the 154th anniversary of the battle. And a brutal battle it was. It ranks only behind Gettysburg in terms of total casualties–about 35 thousand as compared to 46 thousand for the three day Pennsylvania battle. However, casualties at Chickamauga almost equal as a percentage of forces engaged: 28 percent of combatants fell in each. It was one of the few battles in which the Confederates suffered a substantially larger number of casualties than their Federal foes:  Confederate losses at Chickamauga were about 2,300 greater than Union casualties (as compared to a disparity of only 180 at Gettysburg). Indeed, since the Confederates lost relatively few prisoners at Chickamauga, whereas the Federals lost many, the disparity in killed and wounded was even greater.  The total casualties, and the percentage losses, at Chickamauga far exceed those at Antietam.

Chickamauga was a meeting engagement fought in dense woods. These factors made it an extremely chaotic struggle. Divisions and even brigades were thrown from the march into advances through the woods, with no idea of what was in front of them and usually without proper support on the flanks. There were multiple instances in which one force moved undetected through the underbrush to fall on an unsuspecting enemy’s flank, routing him, only to be surprised, flanked, and routed in turn. Some brigades were routed multiple times. Unlike Gettysburg, where artillery could be used to great effect in open fields and from high ground, the effectiveness of artillery at Chickamauga was limited by the sharply limited visibility in the dense forests, and several batteries were surprised and captured because their attackers were on them before the gunners were aware of their presence. The limited effectiveness of artillery also meant that the vast bulk of the casualties were inflicted by musketry, usually delivered at very short range.

Given the confusing nature of the battle, after action reports and battle histories are confusing and contradictory. The battle spawned numerous controversies, most notably between Union commander William S. Rosecrans and division commander Thomas J. Wood. Rosecrans’ order to Wood to move his division, based on faulty information, opened a gap in the Union line which Longstreet’s massive force poured through and split the Union army in two. (Although I should note that given the thinness of the Federal line, and the mass and depth of Longstreet’s column, I think it is highly likely that his attack would have pulverized the Union line even had Wood’s division remained in place. Longstreet rolled over Davis’ division to Wood’s right with hardly a hesitation.)

One of my first Civil War memories is my grandfather explaining the Rosecrans-Wood controversy. I was 9, and we were sitting at the dinner table at a lodge in Lake Kabetogema, Minnesota, where my grandfather went fishing every year. He had Tiparrilo boxes, each one representing a Union division: Reynolds’ (in which my GGGF fought), Brannan’s, and Wood’s. He showed that the existence of Brannan’s division between Wood’s and Reynolds’ made it impossible for Wood to obey literally Rosecrans’ order for “Wood to close up on Reynolds, and support him.” So Wood (represented by a moving Tiparillo box) had to fall back, march behind Brannan’s box, and the move forward behind Reynolds’.

My most tangible piece of family Civil War history is from Chickamauga. My grandmother’s grandfather, George Immel, was a soldier in the 92nd Ohio Infantry, and during the battle was an aide to his brigade commander John Turchin (nee Ivan Turchininov). Immel had been born in Germany, which his parents fled in the aftermath of the 1848 revolution. His mother was distressed that he enlisted: she lamented that she left Germany so that her son would not be conscripted, and here he goes and volunteers to fight in a new country. Turchin’s brigade turned in one of the best performances of the battle, capped with a mad charge across McDonald Field at the end of the fight to open up an escape route for the defeated Yankees. One of George’s memories that he passed down was his recollection of Chickamauga. What he remembered most was the sound. Continuous musketry from morning until well after dark on both days. In his three years of service, he never experienced the like in volume or duration. (His other Civil War memory that was passed down is from the March to the Sea. He loaded up on loot from South Carolina plantations, but eventually tired of his load, and dumped it all.)

The best history of the battle is David Powell’s multi-volume A Mad, Irregular Battle. I agree with most of the interpretations of the often conflicting evidence, except in the case of the fighting around Viniard Farm, which I have studied intensively over the years (and which was chaotic even by Chickamauga standards), and Horseshoe Ridge/Snodgrass Hill.  My favorite Chickamauga book is Archibald Gracie IV’s The Truth About Chickamauga, which he wrote primarily to give proper credit to his father, a Confederate brigade commander whose unit (according to the book) launched the attack that drove the Federals from their last-stand line on “Horseshoe Ridge.” Gracie convincingly argues that the markers and monuments in that area are wrong and misplaced, and were positioned to exaggerate the feats of the brigade of one of the Park commissioners: most historians have perpetuated the official version and slighted Gracie’s, but I think this is mistaken. Gracie spent years corresponding with veterans, and assembled a powerful case. It can be dry reading at times, but it is true original scholarship.

(Archibald Gracie IV was on the Titanic, but survived. He wrote the an book about the tragedy, but his health was devastated by hypothermia experienced during the sinking, and he died eight months later. His father was killed in the trenches at Petersburg in December, 1864, less than 15 months after his moment of glory in the Georgia woods.)

There is a current connection here. General Gracie’s grandfather was a New York merchant who built Gracie Mansion–now the home of New York mayor Bill de Blasio. The Gracie family had a cotton export business in Alabama, which is what brought Archibald Gracie III to Mobile before the war. Ironically, the hard left mayor is on a mission to cleanse New York of any traces of Confederate heritage. Well, in a way he lives in one, though perhaps I shouldn’t give such a hysterical iconoclast any ideas!

Chickamauga was a devastating defeat for the Union Army of the Cumberland. The defeat stung, so when they achieved stunning victories later in the war, first in the storming of Missionary Ridge, later in smashing the Confederate Army of Tennessee at Franklin, they exulted by shouting “Remember Chickamauga!” as a battle cry.

And it should be remembered. Like many western battles, Chickamauga is shaded by more well-know eastern fights. (Stones River/Murfreesboro is even more obscure, even though the percentage losses there were over 31 percent, well in excess of any major battle in the war.) It deserves more attention, because in the Georgia pines tens of thousands of Americans North and South, and of all ranks, displayed in abundance the virtues and vices that were commonplace in America’s most important historical episode. Courage there was in abundance. There was inspired leadership, and command ineptitude. Like the war overall, the battle gave birth to bitter controversies that outlived the principals. It was arguably the greatest tactical victory in the war (rivaled only by Nashville), but was strategically barren. It’s worth knowing more about, and I hope this short post is intriguing enough to entice you into doing so.

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September 19, 2017

Motivated Seller

Filed under: Economics,Energy,Politics,Russia — The Professor @ 8:18 pm

I conjectured that Qatar’s sale of half of its Rosneft stake reflected at least in part the dramatic change in the emirate’s circumstances between December (when it initially bought in) and September (when it sold off), specifically the cold war with Saudi Arabia, the UAE, and the rest of the Gulf Cooperation Council (oxymoron alert!) that broke out over the summer. This conflict has put substantial financial strains on Qatar, which would suggest it bailed on Rosneft (at what price???) to raise cash and reduce risk.

This story from Bloomberg is consistent with that: private depositors have been fleeing Qatar’s banks, and the state is stepping in, putting about $11 billion into these banks. Liquidating investments like the Rosneft stake is one way of raising that cash, and reducing debt. (This raises the possibility that if the crisis drags on, Qatar may sell the rest of its 4.7 percent share of Rosneft.) That is, Qatar could have been a very motivated seller–war clouds can do that to a country. And if it was a motivated seller, CEFC probably obtained its position at a good price, perhaps even a fire sale price. That’s not evident from the reported terms of the transaction, which means that there are side deals.

One other thing about the Qatar-GCC standoff. There are reports that Trump kept the cold war from going hot:

Saudi Arabia and the United Arab Emirates considered military action in the early stages of their ongoing dispute with Qatar before Donald Trump called leaders of both countries and warned them to back off, according to two people familiar with the U.S. president’s discussions.

The Saudis and U.A.E. were looking at ways to remove the Qatari regime, which they accused of sponsoring terrorism and cozying up to Iran, according to the people, who asked not to be identified because the discussions were confidential. Trump told Saudi and U.A.E. leaders that any military action would trigger a crisis across the Middle East that would only benefit the Iranians, one of the people said.

Donald Trump, peacemaker. Not that he’ll get credit. Note that early on, Trump’s pro-Saudi message clashed with Tillerson’s more neutral approach. This story suggests that Trump’s private and public positions may have been different, and that he was really on board with Tillerson all along. Alternatively, Trump initially tweeted his gut reaction, but Tillerson and others quickly persuaded him to moderate his course. Either way, the outcome conflicts with the prevailing narrative about Trump.

 

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State Firms Are Running From Private Banks in Russia: Are Putin’s Hands On or Off?

Filed under: Economics,Politics,Russia — The Professor @ 7:59 pm

Russia’s private banks  are in pretty dire shape. The biggest one, Otkritie, was bailed out. Others have been designated as systemically important (i.e., TBTF), reflecting their size and their marginal financial condition. Further, the FT reports that some private banks are undergoing a run of sorts. Interestingly, the run is being led by state corporations, which are withdrawing billions (of dollars, not rubles)–one unidentified state corporation is leading the way. Such withdrawals sounded the death knell of Otkrite, and are jeopardizing other big private lenders.

In the conventional view of Russia as a centrally directed “vertical of power,” such potentially destabilizing moves by state entities would not take place without Putin’s acquiescence. Indeed, in this view, such moves would most likely occur at his direction.

If that is the case here, one is led to wonder about the motivation given (a) the potential for sparking a banking crisis in Russia, and (b) the cost to the central bank/government of dealing with such a banking crisis: the central bank lent Otkrite about $12 billion over the summer. Certainly, the large state banks (VTB, Sberbank, Gazprombank) would appreciate a reduction in competition for funding, although they are evidently not the only immediate beneficiaries: private bank Promsvyazbank has experienced a surge in deposits from state companies. The inflow to Promsvyazbank followed its designation as a systemically important bank, which may have convinced the state firms that their deposits are effectively backed by the RCB.

So under the power vertical view, this could be perceived as a boon to state banks who may see more deposits from state firms and less competition for funding. It could also reflect bleak choices facing the government and central bank: the weakness of the private banks means that they need to shrink their balance sheets, and the withdrawals by state firms are a way of forcing that outcome. But whence the funds to pay off the fleeing depositors? Asset sales?: fire sales could cause contagion that damages other banks, including the state banks. The central bank?: that would mean that this could be a first step to bailouts and eventual liquidation (or dramatic shrinkage) of the private banking sector.

The alternative explanation is that the state firms are acting on their own hook, and in their own interest, without direction from the top, or without receiving permission despite the potentially systemically risky implications of these moves. In some ways, that would be even more intriguing, as it would suggest a serious degradation of the degree of central control in Russia–or that such control has been overstated all along.

A shaky banking sector will test the RCB, and the government. How it plays out–a relatively orderly wind-down of wobbly lenders directed from the center, or an uncoordinated sauve qui peut by big depositors–will say a lot about the state of the Russian economy, the Russian financial system, and crucially, the true nature of the Putin system. Is the Kremlin orchestrating this behind the scenes, or is it taking place without Putin’s directing hand? Inquiring minds want to know!

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September 16, 2017

The Rosneft Farce Gets More Farcical

Filed under: Energy,Politics,Russia — The Professor @ 11:39 am

A Reuters piece today provides even more evidence of the farcical nature of the Rosneft “privatization.” Specifically, it reports that (a) the CEFC deal was heavily leveraged, and (b) more importantly, a good part of the leverage was from a Russian bank (VTB). The remainder of the debt was provided by the Chinese Development Bank.

Remember Putin’s original injunction to Sechin: the deal should be a real privatization, without participation by Russian banks, and western investors must participate. Remember the triumphant statements of Putin and Sechin at the time of the original deal, and when he awarded Medals of Friendship to two of the big players in the deal: to hear them tell it, the participation of a major western bank, Intensa, was a validation of the legitimacy of the transaction, and an endorsement of Rosneft and Russia as a place to invest.

Of course, those statements were lies when made: Russian banks guaranteed at least Glencore’s debt, so even if they did not provide any funding, they did bear the risk, which is what really matters. Further, the unaccounted for difference between the alleged purchase price and the funds provided by Intesa, Glencore, and QIA also makes it quite possible that Russian banks even chipped in some funding. (VTB was likely one. Gazprombank is another.) And don’t forget that VTB provided bridge financing until Russia cadged Intesa into the deal.

But now the falsity of the original narrative, and original plan, is laid bare. There is not a western entity in sight, unless you count Glencore and its piddling .5 percent stake–which is more than compensated for by generous off take deals and a seat on the Rosneft board. The deal was clearly structured–almost to the kopek–to make Intesa whole, and allow it to flee snowy Russia for sunnier Mediterranean climes (with its CEO Carlo Messina getting a cool Medal of Friendship as a pre-parting gift). A major Russian bank ends up exposed to Rosneft by stepping into Intesa’s place, along with a Chinese state bank. Not a private western investor or lender in sight.

So yes. The Rosneft deal indeed speaks volumes about the company, and about Russia as a place to invest. And what it says is exactly the opposite of the message that Putin trumpeted in December 2016, and again in April (when the friendship medals were awarded).

Think about it. Russia cannot entice private investors to buy into an oil company with access to some of the greatest oil properties in the world. How damning is that?

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