Streetwise Professor

February 2, 2018

American Siloviki

Filed under: Politics,Russia — The Profesor 2 @ 3:43 pm

The long anticipated–and by many feared–release of the House Intelligence Committee majority’s letter on the origins of the Carter Page FISA warrant came out today.  From the pre-release wailing, rending of garments, and gnashing of teeth over the grave threat that it posed to national security, one would have thought it would have contained nuclear launch codes and shocking revelations about Area 51.  In fact, it was anticlimactic, and demonstrated what any sentient being should have been able to figure out: that the FBI and DOJ relied upon the dodgy, fundamentally tainted Fusion GPS/Steele/DNC dossier to obtain a FISA warrant to spy on Page–and hence on others in the Trump campaign.

Anticlimactic, but damning and disgusting nonetheless. Particularly given the revelation that Andrew McCabe, erstwhile deputy director of the FBI, admitted under oath that but for the dossier, the FISA warrant would never have been sought in the first place.  It was clearly pivotal, despite all of the desperate attempts in the media and among Congressional Democrats over the last few days to insinuate that Page had long been on counterintelligence radar.  (This actually cuts the other way–if the pre-dossier evidence against him was so strong, why wasn’t he under surveillance until after the dossier was obtained?)

The essence of the memo (just described) doesn’t really require much discussion.  Those facts speak for themselves. A few details do deserve some comment.

One is the use of a tactic that I have mentioned as being characteristic of KGB methods (though they are no doubt a staple of all intelligence services): planting “information” in a media source as a way of laundering it, enhancing its credibility, and getting it into circulation.  The typical use of this technique is to get the planted information (or disinformation) into the media foodchain so that it gets disseminated more widely.  Here the use of the technique was far more sinister. It was recycled through a friendly journalist (Michael Isikoff) who was then cited as corroboration in the FISA application.

The memo leaves some wiggle room for the FBI and DOJ to claim that they didn’t know that Steele had approached Isikoff, but this requires them to claim that they can’t add 2 and 2: once they read the Isikoff article, knowing what Steele had told them they had to have known that Steele was the source. (Steele apparently tried to craft a cover story by pointing the FBI to a report containing similar information prepared by Clinton crony Cody Shearer–thereby providing a possible alternative source for the Isikoff story.)    Furthermore, within a few weeks the FBI learned that Steele was talking to journalists, and they fired him–yet they did not inform the FISA court about that their initial application was tainted in their applications for renewal.  (I further note that since the FBI fired him–that means they hired him!)

And the renewals brings up another issue: one of the signatures on at least one renewal was Rod Rosenstein’s.  You know, the guy who appointed Mueller and who is overseeing the independent counsel investigation for DOJ because of Session’s recusal.  What the holy F? Rosenstein’s involvement in the FISA process, which is deeply embedded in the Russia investigation, means that he is conflicted as hell.  He should have had nothing whatsoever to do with the appointment of the Special Counsel, and nothing to do now with overseeing him.  This is particularly true since Rosenstein’s knowledge must have included the fact that the original warrant was the fruit of a poisoned tree, and that he failed to disclose that to the FISA court.

James Comey’s fingerprints are all over this as well.  I can’t wait to hear his deep exegesis on the ethics of swearing to a court about the veracity of “salacious, unverified” (his words!) info produced by a rabid partisan and paid for by a presidential campaign to get a warrant to spy on Americans.  And to the ethics of withholding material information from the FISA court.

This last is particularly and disgustingly ironic given that one of the FBI’s objections to the release of the memo was that it omitted relevant facts. I can’t imagine what omitted fact would reverse the conclusions that flow from those that are included.  Putting that aside, the FBI’s objections give a new meaning to chutzpah.

The pre-release shrieking about the memo was beyond hysterical.  Among the most hysterical claims (made by Leon Panetta and others) was that a release of the memo would unleash a Constitutional crisis.

Just how would the Chief Executive’s declassification of a document about the actions of parts of the executive branch constitute a Constitutional crisis? The President holds ultimate classification authority, and is responsible for the execution of the laws and the conduct of executive branch departments, agencies, and employees. Disclosing information about the misbehavior of executive branch officials does not represent a Constitutional crisis: if anything, it is the misbehavior of those officials during a presidential election that raise the issue of such a crisis.

Some of the reporting and commentary on this issue has been utterly incredible (in many senses of the word).  For example, Trump overruled current-FBI director Wray’s objection to releasing the memo.  The WaPo framed this as “Trump defies Wray.” Um, who the hell works for whom? If there is defiance going on, it is Wray’s going public with his objections to the actions of his Constitutional superior.  Wray should have raised his objections in private to Trump, and if overruled (as he was, in the event), kept his mouth shut in public, or resigned–and then kept his mouth shut. To lobby publicly (and disingenuously, by raising national security concerns) in an attempt to pressure his superior into doing something is beyond the pale.

Or should be, anyways. But one thing that this entire sordid episode has demonstrated is that the bureaucracy generally, and the intelligence and federal law enforcement agencies in particular, consider themselves an independent power, a co-equal–superior actually–branch of government, the Constitution be damned. Trump is deemed the usurper.  Indeed, it is clear that many senior members of the FBI, DOJ, and the intelligence community considered it their right to intervene in the election in order to prevent Trump’s election, and failing that, to kneecap his presidency. And virtually all of the political class in the US is on their side. This is the real Constitutional crisis.

You should view this as a Constitutional danger regardless of your partisan leanings. For ask yourself: would you like the same to be done to your guy (or gal)?

It is also disgustingly ironic that in a fervid controversy about the alleged intervention of the Russian siloviki into an American election reveals that high-ranking American officials in control of the vast powers of US law enforcement and intelligence used siloviki methods (including most likely disinformation planted by Russian siloviki!–you can’t make this up!) in an attempt to influence an American election and then to cripple the winner of that election when their original plotting failed

Indeed, the Russian siloviki have it going for them that they aren’t nauseatingly sanctimonious about their skullduggery–refreshingly cynical is more their style. James Comey and others cannot say the same.

And if you think the siloviki analogy is overwrought, consider the not-so-veiled threats expressed on the pages of the WaPo and NYT and by politicians and political pilot fish (e.g., Ben Rhodes) about how dangerous it is to confront the FBI.  Further proof that this rogue influence must be tamed.

Trump showed stones in confronting the FBI and the political class. But perhaps this just demonstrates that he has a strong survival instinct. He knows that he is in a knife fight for his political life–and perhaps his freedom and fortune–and it seems that he has decided that compromise is impossible so escalation is necessary.

This is not the end.  This is at most the end of a beginning. For the acknowledgement that the FBI and DOJ–and the Obama administration–used under false pretenses a dossier paid for by a political campaign and assembled by rabid partisans to obtain permission to spy on an American just raises other questions. Who other than Page was spied on? Were their names unmasked? What use was made of the information obtained from the Page surveillance? By whom?

Given the Herculean effort required to get the memo released, I doubt that these questions will be answered, and if they are answered, it will only happen in after a political brawl that makes the fight of the last few weeks look like childs’ play. The siloviki and their political handmaidens play rough, and play for keeps.


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January 23, 2018

Why Are ABCD Singing the Blues?

Filed under: Commodities,Economics,Russia — The Professor @ 9:49 pm

It’s pretty clear that the major agricultural trading firms, notably the ABCDs–ADM, Bunge, Cargill, and Dreyfus–are going through a rough patch of tight margins and low profits.  One common response in any industry facing these conditions is consolidation, and in fact there is a major potential combination in play: ADM approached Bunge about an acquisition..

I am unsatisfied with most of the explanations given.  A widely cited “reason” is that grain and oilseed prices are low due to bumper crops.  Yes, bumper crops and the resulting low prices can be a negative for producers, but it does not explain hard times in the midstream.  Ag traders do not have a natural flat price exposure. They are both buyers and sellers, and care about margin.

Indeed, ceteris paribus, abundant supplies should be a boon to traders.  More supply means they are handling more volume, which is by itself tends to increase revenue, and more volume means that handling capacity is being utilized more fully, which should contribute to firmer margins, which increases revenues even further.

Greg Meyer and Neil Hume have a long piece in the FT about the potential ADM-Bunge deal. Unfortunately, they advance some implausible reasons for the current conditions in the industry. For example, they say: “At the same time, a series of bumper harvests has weakened agricultural traders’ bargaining power with customers in the food industry.” Again, that’s a flat price story, not a spread/margin story.  And again, all else equal, bumper harvests should lead to greater capacity utilization in storage, logistics, transportation, and processing, which would actually serve to increase traders’ bargaining power because they own assets used to make those transformations.

Here’s how I’d narrow down where to look for more convincing explanations. All else equal, compressed margins arise when capacity utilization is low. In a time of relatively high world supply, lower capacity utilization would be attributable to increases in capacity that have outstripped gains in throughput caused by larger crops.  So where is that increased capacity?

There are some hints of better explanations along these lines in the FT article.  One thing it notes is that farmer-owned storage capacity has increased.  This reduces returns on storage assets.  In particular, when farmers have little on-farm storage they must sell their crops soon after harvest, or pay grain merchants to store it.  If they sell their crops, the merchant can exploit the optionality of choosing when to sell: if they store at a local elevator, they pay for the privilege. Either way, the middleman earns money from storage, either in trading profits (from exploiting the timing option inherent in storage) or in storage fees. If farmers can store on-farm, they don’t have to sell right after harvest, and they can exploit the timing options, and don’t have to pay for storage.  Either way, the increased on-farm storage capacity reduces the demand for, and utilization of, merchant-owned storage. This would adversely impact traders’ margins.

The article also mentions “rivals add[ing] to their crop-handling networks.” This would suggest that competitive entry/expansion by other firms (who?) is contributing to the compressed margins.  This would in turn suggest that ABCD margins in earlier years were abnormally high (which attracts entry), or that the costs of these unnamed “rivals” have gone down, allowing them to add capacity profitably even though margins are thinner.

Or maybe it’s that the margins are still healthy where the capacity expansions are taking place. Along those lines, I suspect that there is a geographic component to this. ADM in particular has its biggest asset footprint in North America. Bunge has a big footprint here too, although it also considerable assets in Brazil.  The growth of South America (relative to North America) as a major soybean and corn exporting region, and Russia as a major wheat exporting region, reduce the derived demand for North American handling capacity (although logistical constraints on Russian exports means that Russian export increases won’t match its production increases, and there are bottlenecks in South America too).

This would suggest that the circumstances of the well-known traders that have more of a North American (or western European) asset base are not representative of the profitability of grain trading overall. If that’s the case, consolidation-induced capacity “rationalization” (and that’s a major reason to merge in a stagnant industry) would occur disproportionately in the US, Canada, and western Europe.  This would also suggest that owners of storage and handling facilities in South America and Russia are doing quite well at the same time that owners of such assets in traditional exporting regions are not doing well.

So I am not satisfied with the conventional explanations for the big ag traders’ malaise during a time of plenty. I conjecture that the traditional players have been most impacted by changes in the spatial pattern of production that has reduced the derived demand to use their assets, which are more heavily concentrated in legacy production regions facing increased competition from increased output in newer regions.

Ironically, I’m too capacity constrained to do more than conjecture. But it’s a natural for my Université de Genève students looking for a thesis topic or course paper topic. Hint, hint. Nudge, nudge.



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January 21, 2018

Somebody Better Put a Tachometer on Lenin’s Corpse

Filed under: History,Politics,Russia — The Professor @ 6:50 pm

One of the most remarkable events–non-events, actually–of 2017 was the virtual total lack of any official Russian recognition of the centenary of the Bolshevik Revolution.  The dilemma is particularly acute for Vladimir Putin, a proud Chekist–and, of course, the Cheka was the creation of the Revolution, and arguably essential to its survival.

But the Revolution’s legacy–including its anti-religious, anti-nationalist ideology, as well as tens millions of dead and the ultimate collapse of the Soviet Union–clashes with Putin’s current ideology of autocracy, orthodoxy, and nationality 2.0.  Hence the low-key (bordering on no-key) recognition of the events of October, 1917.

Last week Putin attempted to square this circle with a truly Orwellian formulation: Communism was Christianity. No–really:

“Maybe I’ll say something that someone might dislike, but that’s the way I see it,” Putin said in an interview for the documentary Valaam, an excerpt of which was broadcast on Russia 1. “First of all, faith has always accompanied us, becoming stronger every time our country, our people, have been through hard times.

“There were those years of militant atheism when priests were eradicated, churches destroyed, but at the same time a new religion was being created. Communist ideology is very similar to Christianity, in fact: freedom, equality, brotherhood, justice – everything is laid out in the Holy Scripture, it’s all there. And the code of the builder of communism? This is sublimation, it’s just such a primitive excerpt from the Bible, nothing new was invented.”

Look, Lenin was put in a mausoleum. How is this different from the relics of saints for Orthodox Christians and just for Christians? When they say that there’s no such tradition in Christianity, well, how come, go to Athos and take a look, there are relics of the saints there, and we have holy relics here,” Putin concluded.

Somebody should look in said mausoleum to see if Lenin is spinning at about 1000 RPM at the the assertion that his creation and ideology were mere sublimations of primitive Christianity.  Ditto Marx’s grave in London.

Make no doubt that Putin is going all in on Orthodoxy: just note his recent frigid dip to celebrate the Epiphany.

Moreover, Putin is being very selective in his commemorations of Russian history. For instance, largely reviled by the Orthodox, Peter the Great is virtually absent. And now we see that he reinterprets the most epochal–and apocalyptic–event in Russian history, a Revolution that was driven by a hatred and rejection of orthodox, nationalist autocracy, as some sort of historical continuity.

This is all quite amazing. Evidently Putin does not believe that he can attack communism, Bolshevism, and Leninism outright, because they resonate with too many people–particular among his political base. But he is acutely aware of the tension between his current crypto-tsarist ideology and the militantly anti-tsarist ideology that dominated Russia for 75 years.  So in a very Soviet way he completely rewrites history to assert that black is really white.

When Putin says “that’s the way I see it” what he really means is: that’s the way Russians are supposed to see it–get with the program. Who are you going to believe, Putin or your lying eyes?


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January 17, 2018

No Yodeling Required!: Swiss Sanity on Citizenship

Filed under: Economics,Politics — The Professor @ 7:39 pm

Not long after finishing my immigration post, I came across this article that cracked me up:

Dutch vegan who applied for a Swiss passport has had her application rejected because the locals found her too annoying

Nancy Holten, 42, moved to Switzerland from the Netherlands when she was eight years old and now has children who are Swiss nationals.

However, when she tried to get a Swiss passport for herself, residents of Gipf-Oberfrick in the canton of Aargau rejected her application.

I guess they can’t kick her out, but they can deprive her of citizenship.  (And “Oberfrick”–heh.)

This is an amusing illustration of a broader Swiss principle: who gets to be Swiss depends on their contribution to Switzerland, and their ability to integrate with those already there.  A more serious illustration comes from a recent change in Swiss citizenship law:

On 20 June 2016, the Swiss Parliament voted on the new Swiss Citizenship Act, which will come into force together with the relevant Ordinance on 1 January 2018. The main aim of the new law is to limit the issuance of Swiss citizenship to well-integrated foreign nationals only. Furthermore, the Citizenship Act also aims to harmonise the residence requirements and implement into a law the authorities’ practice. [Emphasis added.]

. . . .

Under current law, the basic requirements to obtain Swiss citizenship can be summarised as follows: a. The applicant must have resided a minimum of 12 years in Switzerland (of which at least three years within the five years prior to the application) and a certain amount of time (usually between two to five years) in a specific canton and in a specific commune prior to being able to apply. Shorter periods apply to certain categories of applicants aged between 10 and 20 years for whom the years spent in Switzerland between their 10th and 20th birthdays count double in the calculation of the 12- year period required at the federal level. b. The applicant must prove that he/she is well integrated in Switzerland. As per the current practice of the Swiss authorities, the following requirements usually need to be fulfilled: the applicant must have a clean criminal record, prove that he/she fulfils all financial obligations, in particular with respect to tax payment, has a good reputation, has a good knowledge of a Swiss national language (i.e. French, German or Italian), has a basic knowledge of Swiss geography and history, and knows how the Swiss political system functions. c. Additional requirements may need to be met according to the respective cantonal and/or communal laws.

. . . .

Only applicants holding a C-type permit (permanent residence permit) may apply for Swiss citizenship (currently, holders of B-type residence permits may also apply). The applicant must have resided a total of 10 years in Switzerland (not 12 years as today). The ordinance to the SCA now details the concept of ‘good integration’. According to the ordinance, an applicant is deemed as being well integrated if he/she:

• has good oral and written language skills in one of the national languages;

• respects the public order and security;

• respects the Swiss federal constitution;

• participates in the economic life or undergoes education, i.e. the applicant is employed or attends a school/university;

• ensures that his/her family members are integrated;

• is not a threat to the internal and external security of Switzerland;

• is familiar with Swiss living conditions.

Applicants with a criminal record or who are dependent on Swiss social welfare will most likely be rejected.

Indeed, regarding the last point, the new law precludes citizenship for those who have been on public assistance in any time in the past three years.

Fortunately, it appears that yodeling is not a requirement!

Note that none of these criteria are based on nation of origin.  There will no doubt be a relationship between the likelihood of meeting these criteria, and whether one emigrates from a s***hole, but the law does not discriminate or create quotas on the basis of national origin (which is likely by itself to be a very crude proxy for ability to contribute, and which is part of US law primarily as the result of ethnic politics).

Certain aspects of the Swiss naturalization system are not practical for the US.  In particular, the role of cantonal and communal authorities in authorizing citizenship (as the Annoying Dutch Vegan found out to her chagrin) is a non-starter here.  This conflicts with the US Constitution, and is at odds with the much greater mobility of Americans vs. Swiss.  But the principle of conditioning citizenship on integration, fluency in a national language, non-dependence on public assistance, lack of a criminal record, etc., is certainly possible in the US, and makes sense.  It is certainly a more rational and sober policy than one that revolves around nauseating pap about “dreamers” and the like: whenever a debate centers on agitprop and euphemisms you know it is fundamentally dishonest and manipulative.

You can’t paint the Swiss as mouth-breathing populist, nationalist wackos: if anything, they are a little too control-freakish for me (and most Americans, I’d wager).  Indeed, the Swiss have been very successful at balancing a deep integration in the world economy and international institutions with a pride in their own national traditions and mores, and a desire to preserve them.  They have avoided many of the problems that somewhat similar nations (notably Sweden and the Netherlands) have experienced with their immigration policies. (There’s nothing like Malmo or Gothenburg or Rotterdam in Switzerland.)  The Swiss have struck a reasonable balance between openness to foreigners and national pride, and are not consumed by the neurotic complexes and self-loathing that have paralyzed many Swedes, Dutch, Germans, etc. (and the governments of these nations).

Switzerland therefore represents a plausible example/role model for a reasoned immigration debate in the US. Yet it is almost never mentioned here.

And it’s not just immigration.  The Swiss health care system has much to recommend it–far more than the dysfunctional system that prevails in the US.  The Swiss model would be a great starting place for a transformation of US healthcare.  I’d prefer an even more market-based system, but politics is the art of the practical, and I realize that my ideal is not gonna happen. But the Swiss model meets many of the goals of the left in a much more efficient way than our current system, and certainly dominates monstrosities like the UK or Canadian systems.

It would be impossible–and indeed, highly objectionable–to try to make the US like Switzerland. For myriad reasons. But there are some things we can take from Switzerland, or should at least consider seriously. Not that I’m holding my breath.

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January 15, 2018


Filed under: Economics,Politics,Uncategorized — The Professor @ 8:30 pm

A few comments on ShitholeGate.

First, I dunno if Trump said it. It sounds in character, but the sources for it (being anonymous and/or Dick Durbin) are hardly unimpeachable.

Second, there must be a shortage of fainting couches, smelling salts, and pearls for clutching in DC and media land, given the collective swooning and shock at the thought that a president used a four letter word.

Uhm, LBJ anybody? Nixon?

Third, there are logically coherent and logically incoherent objections to what Trump allegedly said about questioning the wisdom of admitting more people from shitholes than non-shitholes (e.g., Norway–though at one time, my ancestors apparently disagreed!)

The logically coherent objection is: “Yes, these are horrible, abjectly miserable places, which is why we should take in people from them, on humanitarian grounds.”

The logically incoherent objection is: “How dare you call them shitholes! They are wonderful places full of wonderful people! But we are rescuing people from lives of misery by taking in the poor and huddled masses from these places.” If they’re so great, why the intense desire to leave?

Suffice it to say, the logically incoherent objection has been the dominant narrative on the left.

The logically coherent objection creates its own issues: logical coherence is necessary for it to be a reasonable policy position, but by no means sufficient.

One of the issues is: what is the limiting principle? Or is there none?: do you favor no restrictions on immigration whatsoever? If that’s your position–be open about your support for open borders. Don’t try to have it all ways.

If you do favor restrictions, what criteria will you apply for determining who can immigrate to the US? What are the benefits? The costs? What is the incidence of those costs and benefits? Again, be open about it–speaking in gauzy generalities is dishonest, and makes it impossible to evaluate your position.

A related issue is that those who object to, or even have reservations about, open borders or even relatively liberal immigration policy are routinely excoriated as racists and bigots. Yes, some are. But many are not, even though they have a strong preference for traditional American culture which is deeply rooted in European cultures and ethnicity. Do you believe that is a legitimate preference?  If not, do you advocate the rejection of democratic means to decide immigration matters because those with illegitimate views might prevail? Further, African Americans are to a large extent more opposed to immigration than white Americans. Is that due to racism? Or is it a telling indication that the views on immigration also (and arguably primarily) fall along economic/class lines?

This touches upon another element of incoherence in the immigration debate: assimilation. Many (and arguably most, now) advocates of liberal immigration policies are hostile to the notion of assimilation, again imputing racist motives and cultural bigotry to those who believe that current immigrants should assimilate the way that their grandparents and great-grandparents and generations before them did. But hostility to assimilation and hostility to those who favor assimilation means that it’s OK for some (immigrants) to prefer their own culture, ethnicity or race, but it’s not OK for others (the native born) to do so.

This is another variation on the incoherence of identity politics. The most ardent advocates of identity politics scorn intensely those who feel that their identity is threatened by mass immigration, especially mass immigration without assimilation. In the identity politics animal farm, all identities are equal, but some are more equal than others.

Along these lines, it is pretty apparent that the political elites who are most ardent in support of very liberal immigration policies are those who are least likely to be disclocated by large flows of immigrants, and may indeed benefit from it. Those they scorn–many of whom voted for Trump–are the ones most likely to be adversely impacted, either economically or socially/culturally.  Ironic coming from people who are also likely to claim that they favor redistribution in order to reduce economic inequality.

Personally, I confess to some ambivalence on these matters. The libertarian in me favors free movement of people. At the same time, I recognize the Friedman/Richard Epstein point that the welfare state means that immigration is not the result of mutually beneficial bargains entered into without coercion: immigration attracted by the potential to obtain benefits funded by coercive taxation is problematic indeed. (Friedman and Epstein object to the welfare state in large part because it makes unrestricted immigration infeasible.) Furthermore, I understand the importance of social trust and communication and coordination due to shared assumptions and beliefs, and how those can be facilitated by some homogeneity in ideals and culture and background. Relatedly, a democratic polity operating on a principle of consent has to give preference to current citizens.

Immigration has always been a fraught issue in the US, although the intensity of views about it has waxed and waned over time. Our handling of the issue has never been perfect, but I think that (a) the US historically did a better job of it than any country in history (certainly modern history), and (b) we handled immigration best prior to the rise of the welfare state, and when assimilation was a widely shared ideal. Those conditions do not prevail now, which makes me much more cautious, and indeed skeptical, about relatively untrammeled immigration. As a result, I think it’s fair to ask: how many should we accept from where?, and shouldn’t we be more skeptical about mass immigration from countries that are vastly different economically, culturally, and socially?

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January 10, 2018

Red on Red: Simpson vs. Browder

Filed under: Politics,Russia — The Professor @ 7:02 pm

Some time back I promised a post on Bill Browder. A hectic schedule and the holidays intervened, so though I’d collected loads of material, I didn’t have time to write a post. Events from yesterday–namely the release of the transcript of Fusion GPS head Glenn Simpson’s interview with Congressional investigators–make this timely, so I’ll try to summarize what I have concluded. Oddly, one conclusion is that when it comes to Bill Browder, Simpson and I are of like mind. On other matters no–but even there Simpson’s Browder testimony shows precisely why his opinions on Trump are suspect.

As for Browder, here are my conclusions in somewhat abbreviated form.

First, Browder assiduously cultivates the image that Diogenes’ search for an honest man would have ended had the old Greek met one Bill Browder. But in fact, his honesty, integrity, and scruples are highly questionable indeed.

The essence of the Browder as Hero narrative is that he was a lone crusader for honest business practices in Russia, and that he fought a corrupt and brutal establishment. In retribution, the establishment stole one of his companies in order to defraud the Russian government, and killed Browder’s loyal employee, Sergei Magnitsky when he had the temerity to challenge them. Bill Browder, martyr by proxy.

A review of his actual business dealings in Russia strongly suggests a very, very different story.

For one thing, Browder was engaged in the voucher privatizations of the 1990s. These were, without cavil, among the most monstrous acts of mass theft and fraud in modern economic history. They were the primitive capitalist accumulation that built many modern Russian fortunes (and filled more than a few graveyards). Any Dudley Do-Right who tried to operate in that environment would have been ground to dust within weeks, if not days. It was an extreme Darwinian environment in which the most unscrupulous and often most brutal prevailed. If Browder survived that–and indeed thrived–draw your own conclusions.

For another, Browder’s initial partner in Hermitage Capital Management (his investment vehicle in Russia) was Edmund Safra. Safra’s sketchy dealings are legendary. He always dismissed allegations about his shady business practices as antisemitic, but there are many other Jewish financiers who have not attracted the same criticism. Further, Safra was involved (through his Republic Bank) in a mysterious scheme to jet billions of dollars in cash to Russia during the 1990s–it was dubbed “the money plane.” Just what went on there is unknown, but it doesn’t pass the smell test.

Safra died under bizarre circumstances in Monaco in 1999. An ex-Marine who served as his nurse was convicted of murder, but few find that story plausible, or complete. One of the competing theories is that he was killed by the Russian mob. (There are so many suspects, that maybe the true story is something along the lines of Murder on the Orient Express–everybody did it.)

Regardless, voucher privatizations plus Safra is hardly the CV of a commercial saint.

Browder also claims that he tried to bring honest corporate governance to Russia. He points to his attempts to change Gazprom as an example.

A different story is far more plausible: Browder’s investment in Gazprom was an arbitrage play, pure and simple. Due to restrictions on foreign ownership of Gazprom’s Russian shares, those shares sold at a substantial discount to the ADRs traded outside of Russia. Browder found a way–legal he says, illegal say the Russians–to buy Gazprom Russian shares. This allowed him to capture the big discount.

Putting the legality of the structure that he used to buy the shares aside, making an arb trade like that can be very profitable, and thus very attractive. That’s why Browder and his investors wanted in. Given the farcical prospects for actually changing Gazprom’s governance, I’m pretty sure that the Corporate Crusader act that Browder put on was just a cover for his more mercenary motives.

And this is a general impression that I come away with after reading a lot about him. The whole Last Honest Man in Russian Investing shtick was a canny PR ploy that allowed his backers to distance themselves from the tawdry (and worse) reputation that investing in Russia had at the time. Browder was their beard that allowed them to pretend that they were in an honest relationship.

Browder has been prosecuted by the Russian government, both for tax violations and his purchase of Gazprom shares. He portrays these prosecutions as vengeance for his crossing the wrong people in his crusade for honest business practices in Russia. I have no doubt that his prosecution might have been selective, and indeed driven by vengeance–but maybe not as revenge for his honesty, but for his taking from the wrong people. Further, even if the prosecutions were selective (i.e., others doing the same but not prosecuted) and driven by vengeance, that doesn’t mean they weren’t justified–and perhaps even just.

I don’t have the basis to opine on the legality of the structure of his Gazprom purchases. But I can say that the Russian accusations regarding tax violations seem very plausible. These involved setting up companies that received tax breaks for hiring disabled veterans, but the Russians colorably show that he did no such thing.

The Russians also allege that he was in fact involved in the tax fraud that resulted in Magnitsky’s death. This allegation is far more speculative, and perhaps libelous–but it is not totally lacking in plausibility, especially in light of Browder’s track record.

Since getting kicked out of Russia in 2005, and since Magnitsky’s death, Browder has spent his life crusading against Putin and the Russian government. The centerpiece of his campaign is the alleged involvement of Russian government officials (tax officials mainly) in the theft of $230 million in tax refunds fraudulently obtained from a Hermitage company seized by the Russians, and the death of Magnitsky while in custody in an investigation of the theft.

Here it is evident that Browder’s relationship with the truth is, well, situational and transactional. The best evidence of this is his deposition in the Prevezon case in New York. Browder tried mightily to avoid being served, and here is one place where Browder and Simpson intersect: Simpson was part of the effort to serve Browder, on behalf of his (indirect) client, Prevezon CEO Denis Katsyv.

During that deposition, Browder admitted repeatedly that he had no evidence whatsoever to back some of his most lurid and damning allegations against those he alleges were complicit in the Russian tax fraud and the death of Magnitsky. For instance, he has claimed repeatedly that he could trace the ill-gotten gains from the tax fraud to specific individuals. In the deposition, he admitted he could not.

(Here Browder has something in common with dossier assembler Christopher Steele. Once in court testifying under the penalty of perjury, Steele was at pains to admit that the claims in the dossier were unsubstantiated, in contrast to his hair on fire representations to the FBI.)

This is particularly outrageous given the fury with which Browder attacks anyone who questions his dealings or veracity.

So my conclusion is: Browder is a con-man and a liar. If he tells you the sun rises in the east, buy a compass and wait for sunrise.

Glenn Simpson of dossier infamy is of the same opinion. Simpson did a deep documentary dive on Browder for Prevezon’s lawyers, Baker Hostetler, and came to many of the conclusions I outline above, and some more to boot. If you read the transcript of Simpson’s interview (not testimony) before Senate Judiciary Committee investigators, you’ll see what Simpson dug up and the basis for his conclusions.

Well, doesn’t this mean that I therefore have to give credence to Fusion GPS’s research on Trump? Quite to the contrary: the difference in the methods in the Browder and Trump matters is striking. When investigating Browder, Fusion GPS did a deep dive on documentary evidence in the US, Russia, and presumably Cyprus (where Browder registered companies). (See pp. 41-49 of the transcript. Simpson is so detailed in his description of what he did in the Browder investigation that the lawyer questioning him said “Thank you for the narrative answer.” LOL.)

In contrast, with regards to Trump, Simpson et al (a) read some books, and (b) commissioned the Steele investigation, which apparently just involved in talking to people (just who is a complete mystery) who passed on unverified and unverifiable gossip. The basis for Simpson’s claim that Trump had Russian mafia connections is that Trump had connections with Felix Sater who allegedly had connections with the Russian mob: similarly Paul Manafort.

Thus, whereas the foundation for Simpson’s opinions on Browder is rock-solid, that for his opinions on Trump are charitably described as quicksand.

Simpson’s statements also call into question his honesty. When asked when he had any Russian-speaking employees, he mentioned one guy–who happened NOT to be Nellie H. Ohr, wife of ex-DOJ Associate Deputy AG. We now know that Mrs. Ohr worked for Fusion. Sean Davis said on Twitter that this was an “interesting omission.” I said it was an interesting perjury.

Simpson also insinuated that the FBI had an independent source to justify FISA-ing Trump campaign personnel–and that this guy was a walk-in. When the transcript was released, a “source close to Fusion GPS” said nope. Never happened. He was referring to Papalopolous. Another strike for his credibility.

Simpson strains credulity past its breaking point when he claims that even though he had dinner with Natalia Veselnitskaya the night before and the night after her meeting with Trump Jr., the subject never came up (she was at the other end of the table, he doesn’t speak Russian and she doesn’t speak English–even though they apparently could communicate well enough for her to get him to help her obtain a visa). Simpson claims to have been shocked at the news. Please. Big investigative reporter turned PI/opposition researcher has no clue about a bombshell meeting even after spending hours with some of the principals? He didn’t even bother to ask through a translator (who Veselnitskaya must have had along) “hey, Natalia, whatcha been doing in New York?” Please.

So my rule for Simpson is the same as for Browder: unless he has the documents to prove it, don’t believe a word he says. He will distort the truth to advance his agenda.

The most entertaining part of this is the red-on-red nature of the battle. Heretofore Browder has been something of a hero among the anti-Trump set (yeah, I’m looking at you, Michael Weiss) because he is ardently anti-Putin, and Trump is supposedly Putin’s bitch. But Simpson has even better anti-Trump bona fides, for the dossier is directly anti-Trump, whereas Browder’s  anti-Putin stance is anti-Trump only via (an alleged) transitivity.

So given a choice between Browder and Simpson, most of the anti-Trumpers are going with Simpson, and either explicitly or implicitly dumping and dissing Browder.

Karma, Bill. Karma.

Browder being Browder, he will no doubt go after Simpson with all guns blazing.

I’m stocking up on the popcorn.

The left and the media (I repeat myself, yet again) may end up ruing their choice. Given the extremely dubious nature of the dossier and those who funded, created, and disseminated it, and the very great likelihood that it was used as the basis to engage in counterintelligence surveillance of Trump campaign personnel, I believe that the dossier will likely prove the greatest political boomerang in modern political history, and will end up braining those who threw it (which includes the Clinton campaign, Fusion GPS/Simpson, the FBI and other US intelligence agencies, the media, and the “Resistance”). And if this happens, Bill Browder will be little more than collateral damage.

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January 2, 2018

Buyer Beware: Bart Does Crypto

Filed under: Commodities,Derivatives,Economics,Energy,Regulation — The Professor @ 8:08 pm

Back in the day, Bart Chilton was my #2 whipping boy at the CFTC (after Gary Gensler AKA GiGi). Bart took umbrage (via email) at some of my posts, notably this one. Snort.

Bart was the comedian in that dynamic duo. He coined (alert: pun foreshadowing!) such memorable phrases as “cheetah” to criticize high frequency traders (cheetah-fast cheater–get it? Har!) and “massive passives” to snark at index funds and ETFs. Apparently Goldilocks could never find a trading entity whose speed was just right: they were either too fast or too slow. He blamed cheetahs for causing the Flash Crash, among other sins, and knocked the massive passives for speculating excessively and distorting prices.

But then Bart left the CFTC, and proceeded to sell out. He took a job flacking for HFT firms. And now he is lending his name (I won’t say reputation) to an endeavor to create a new massive passive. This gives new meaning to the phrase sell out.

Bart’s massive passive initiative hitches a ride on the crypto craze, which makes it all the more dubious. It is called “OilCoin.” This endeavor will issue said coins, and invest the proceeds in “reserve barrels” of oil. Indeed, the more you examine it, the more dubious it looks.

In some ways this is very much like an ETF. Although OilCoin’s backers say it will be “regulatory compliant,” but even though it resembles an ETF in many ways, it will not have to meet (nor will it meet, based on my reading of its materials) listing requirements for ETFs. Furthermore, one of the main selling points emphasized by the backers is its alleged tax advantages over standard ETFs. So despite the other argle bargle in the OilCon–excuse me, OilCoin–White Paper, it’s primarily a regulatory and tax arb.

Not that there’s necessarily anything wrong with that, just that it’s a bit rich that the former stalwart advocate of harsher regulation of passive commodity investment vehicles is part of the “team” launching this effort.

I should also note some differences that make it worse than a standard ETF, and worse than other pooled investment vehicles like closed end funds. Most notably, ETFs have an issue and redemption mechanism that ensures that the ETF market price tracks the value of the assets it holds. If an ETF’s price exceeds the value of the assets the ETF holds, an “Authorized Participant” can buy a basket of assets that mirrors what the ETF holds, deliver them to the ETF, and receive ETF shares in return. If an ETF’s price is below the market value of the assets, the AP can buy the ETF shares on the market, tender them to the ETF, and receive an equivalent share of the assets that the ETF holds. This mechanism ties the ETF market price to the market prices of its assets.

The OilCoin will not have any such tight tie to the assets its operators invest in. Insofar as investment policy is concerned:

In addition to investing in oil futures, the assets supporting OilCoin will also be invested in physical oil and interests in oil producing properties in various jurisdictions in order to hold a diversified pool of assets and avoid the risk of holding a single, concentrated position in exchange traded futures contracts. As a result, OilCoin’s investment returns will approximate but not precisely track the price movement of a spot barrel of crude oil.

I note the potential illiquidity in “physical oil” and in particular “interests in oil producing properties.” It will almost certainly be very difficult to value this portfolio. And although the White Paper suggests a one barrel of oil to one OilCoin ratio, it is not at all clear how “interests in oil producing properties” will figure into that calculation. A barrel of oil in the ground is a totally different thing, with a totally different value, than a barrel of oil in storage above ground, or an oil futures contract that is a claim on oil in store. This actually has more of a private equity feel than an ETF feel to it. Moreover, even above ground barrels can differ dramatically in price based on quality and location.

Given the illiquidity and heterogeneity of the “oil” that backs OilCoin, it is not surprising that the mechanism to keep the price of the OilCoin in line with “the” price of “oil” is rather, er, elastic, especially in comparison to a standard ETF: the motto of OilCoin should be “Trust Us!” (Pretty funny for crypto, no?) (Hopefully it won’t end up like this, but methinks it might.)

Here’s what the White Paper says about the mechanism (which is a generous way of characterizing it):

OilCoin’s investment returns will approximate but not precisely track the price movement of a spot barrel of crude oil.

. . . .

In order to ensure measurable intrinsic value and price stability, each OilCoin will maintain an approximate one-to-one ratio with a single reserve barrel of oil. [Note that a “reserve barrel of oil” is not a barrel of any particular type of oil at any particular location.] This equilibrium will be achieved through management of the oil reserves and the number of OilCoin in circulation.

As demand for OilCoin causes the price of a single OilCoin to rise above the spot price of a barrel of oil on global markets [what barrel? WTI? Brent? Mayan? Whatever they feel like on a particular day?], additional OilCoin may be issued in private or open market transactions and the proceeds will be invested in additional oil reserves. Similarly, if the price of an OilCoin falls below the price of a barrel of oil, oil reserves may be liquidated with the proceeds used to purchase OilCoin privately or in the open market. This method of issuing or repurchasing OilCoin and the corresponding investment in or liquidation of oil reserves will provide stability to the market price of OilCoin relative to the spot price of a barrel of crude oil and will provide verifiable assurances that the value of oil reserves will approximate the aggregate value of all issued OilCoin.

OilCoin’s price stability program will be managed by the OilCoin management team with a view to supporting the liquidity and functional operation of the OilCoin marketplace and to maintaining an approximate but not precise correlation between the price of a single OilCoin and the spot price of a single barrel of oil [What type of barrel? Where? For delivery when?]. While maintaining price stability of digital currencies through algorithmic purchase and sale may be appropriate in certain circumstances, and while it is possible as a technical matter to link such an algorithm to a programmed purchase and sale of oil assets, such an approach would be likely to result in (i) the decoupling of the number of OilCoin in circulation from an approximately equivalent number of reserve barrels of oil, and (ii) a highly volatile stock of oil reserve assets adding unnecessary and avoidable transaction costs which would reduce the value of OilCoin’s supporting oil reserve assets. Accordingly, it is expected that purchases and sales of OilCoin and oil reserves to support price stability will be made on a periodic basis [Monthly? Annually? When the spirit moves them?] as the price of OilCoin and the price of a single barrel of oil [Again. What type of barrel? Where? For delivery when?] diverge by more than a specified margin [Specified where? Surely not in this White Paper.]

[Emphasis added.]

Note the huge discretion granted the managers. (“May be issued.” “May be liquidated.” Whenever they fell like it, apparently, as long as there is a vague connection between their actions and “the spot price of crude oil “–and remember there is no such thing as “the” spot price) A much less precise mechanism than in the standard ETF. Also note the shell game aspect here. This refers to “the” price of “a barrel of oil,” but then talks about “diversified holdings” of oil. The document goes back and forth between referring about “reserve barrels” and “barrels of oil on the global market.”

Note further that there is no third party mechanism akin to an Authorized Party that can arb the underlying assets against the OilCoin to make sure that it tracks the price of any particular barrel of oil, or even a portfolio of oil holdings. This means that OilCoin is really more like a closed end fund, but one  that is not subject to the same kind of regulation as closed end funds, and which can apparently invest in things other than securities (e.g., interests in oil producing properties), some of which may be quite illiquid and hard to value and trade. One other crucial difference from a closed end fund is that OilCoin states it may issue new coins, whereas closed end funds typically cannot have secondary offerings of common shares.

Closed end funds can trade at substantial premiums and discounts to the underlying NAV, and I would wager that OilCoin will as well. Relating to the secondary issue point, unlike a closed end fund, OilCoin can issue new coins if they are at a premium–or if the managers feel like it. Again, the amount of discretion possessed by OilCoin’s managers is substantially greater than for a closed end fund or ETF (or an open ended fund for that matter). (There is also no indication that the managers will be precluded from investing the funds in their own “oil producing interests.” That potential for self-dealing is very concerning.)

There is also no indication in the White Paper as to just what an OilCoin gives a claim on, or who has the control rights over the assets, and how these control rights can be obtained. My reading of the White Paper does not find any disclosure, implicit or explicit, that OilCoin owners have any claim on the assets, or that someone could buy 50 percent plus one of the OilCoins, boot the existing management, and get control of the operation of the investments, or any mechanism that would allow acquisition of a controlling interest, and liquidation of the thing’s assets. (I say “thing” because what legal form it takes is not stated in the White Paper.)  These are other differences from a closed end fund or ETF–and mean that OilCoin is not subject to the typical mechanisms that protect investors from the depredations of promoters and managers.

A lot of crypto is all about separating fools from their money. OilCoin certainly has that potential. What is even more insidious about it is that the backers state that it is a different kind of crypto currency because it is backed by something: in the words of the White Paper, OilCoin is “supported” by the “substantial intrinsic value of assets” it holds. The only problem is that there is no indication whatsoever that the holder of the cryptocurrency can actually get their hands on what backs it. The “support” is more chimerical than real.

So my basic take away from this is that OilCoin is a venture that allows the managers to use the issue of cryptocurrency to fund totally unconstrained speculations in oil subject to virtually none of the investor protections extended to the purchasers of securities in corporations, investors of closed end funds, or buyers of ETFs. All sickeningly ironic given the very public participation of a guy who inveighed against speculation in oil and the need for strict regulation of those investing other people’s money.

My suggestion is that if you are really hot for an ICO backed by a blonde, buy whatever Paris Hilton is touting these days, and avoid BartCoin like the plague.




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December 29, 2017

Remembering a Forgotten Battle: Stones River, 1862-63.

Filed under: Civil War,History — The Professor @ 6:49 pm

New Years Eve day will be the 155th anniversary of one of the forgotten battles of the Civil War–Stones River (styled Murfreesboro by the Confederates). The battle was actually fought over two days–31 December, 1862 and 2 January, 1863. It resulted in almost 25,000 casualties, but was overshadowed by other events. The Union disaster at Fredericksburg on 13 December and the subsequent Mud March fiasco in January–these events took place much closer to the political capital and media centers of the North–attracted far more notice. The destruction of Grant’s supply depot at Holly Springs on 20 December, and his subsequent retreat from northern Mississippi (thereby terminating his first attempt at Vicksburg) and the nearly simultaneous bloodying of Sherman at Chickasaw Bluffs outside of Vicksburg also detracted attention from the battle in middle Tennessee. The indecisive nature of the combat also helped doom the battle to obscurity: there was no real victor, and no major strategic outcome from all the bloodletting.

The 25,000 combined casualties ranks only 6th on that grim list for the Civil War. But it was the bloodiest major battle in proportion to numbers engaged–the percentage loss on both sides was almost one-third of the troops that fought there. In contrast, the loss rate at Gettysburg was about 28 percent. Absolute casualties were larger at the Wilderness, but more than twice as many men fought in that 1864 Virginia battle.

Yet Stones River is obscure. This is unfortunate, and a slight to those who fought there. And fight they did.

Stones River was the middle of three gruesome battles fought between the Army of the Ohio/Cumberland and the Army of Mississippi/Tennessee between 8 October, 1862 (Perryville) and 19-20 September, 1863 (Chickamauga). All three battles demonstrated the offensive prowess of Bragg’s Confederate army. At Perryville, a Rebel offensive pulverized McCook’s corps. At Stones River, the Southern assault wrecked McCook’s Corps again, and did considerable damage to Crittenden’s as well. At Chickamauga, the Confederate onslaught crushed both. Only when Union troops fought behind fortifications were they ever able to withstand an attack by the Army of Tennessee, until that attack was spent.*

But the battles also illustrated the limits of the offensive. The casualty toll suffered by the Confederate attackers, and the disorganization, physical and emotional exhaustion, and chaos resulting from even  successful assaults, made it impossible to sweep the battered Union armies from the battlefield. In each case, it was easier for the defenders to retreat and form a coherent defense than it was for the winded and bloodied attackers to regroup for a final decisive charge.

Moreover, in each battle, stalwart defenses by relatively small Union commands delayed and disrupted the Confederate attacks sufficiently to allow the Union troops to rally sufficiently to avoid annihilation. At Perryville, Starkweather’s brigade performed this vital task. At Stones River, Sheridan’s division held long enough in the cedars to permit Rosecrans to form a final line at the Nashville Pike. Further, Hazen’s brigade held the Round Forest against repeated attacks. At Chickamauga, the stand around Horseshoe Ridge anchored by Harker’s and Vanderveer’s brigades plus the detritus of many Union regiments permitted Thomas to extract the Union army from its parlous position.

And in all three battles, the failure to achieve decisive victory despite driving Federal troops from position after position, set off bitter recrimination’s in Bragg’s army. After Stones River, Bragg and division commander Breckenridge (former Vice President of the US, and eventual Secretary of War for the Confederacy) engaged in a vicious argument over responsibility for Breckenridge’s disastrous assault on 2 January. In the rest of the army there was grave dissatisfaction over the failure to achieve victory. The poisonous atmosphere hamstrung the army for the remainder of Bragg’s unhappy tenure as commander.

The performance of Confederate troops during this and the other two battles is all the more remarkable given the utterly dysfunctional command structure that ordered and led them into battle.

So take a moment to remember this forgotten contest. Those who fought and bled there do not deserve the obscurity that has characterized the battle almost since the day it was fought. It demonstrates the remarkable qualities of the private soldiers and many of the field grade and company officers on both sides–and the extreme limitations of their commanders. It was a soldier’s battle par excellence, and those soldiers deserve recognition for their stalwart performance on two wintery days in middle Tennessee.

*To this I should add the Army of Mississippi’s assaults on the first day at Shiloh, which almost succeeded in driving Grant’s Army of the Tennessee into the river from which it took its name. Van Dorn’s Army of West Tennessee smashed Rosecran’s Army of the Mississippi on the first day of the Battle of Corinth (3-4 October, 1862), and its assaults on the second day pushed back Rosecrans’ right wing into the town: the Union left was heavily fortified, and this allowed it to hold off the attack on its sector.  Some units of Van Dorn’s army, notably Moore’s Texas Brigade and the Missouri  Brigade fought with the Army of Tennessee during the Atlanta and Nashville campaigns. The counterattack of Bowen’s Division at Champion Hill, which almost brought Grant’s army to ruin in that decisive battle, is another example of the striking power of Confederate troops in the Western Theater. Most of the Confederate attacks on the first day at Chickamauga, with the exception of Cheatham’s Division’s assaults in the Brock Field Area, were initially successful, but ultimately indecisive because of the inevitable loss of impetus due to casualties and disorganization. Breckenridge’s attack on 2 January at Stones River also succeeded in smashing the Union left flank across the river, only to be repelled by the massed artillery battery (57 guns firing on the Confederate  front and flank)  assembled by Captain John Mendenhall.

No other army on either side mounted so many successful frontal attacks. (Many of the Army of Northern Virginia’s successful attacks, e.g., Second Manassas, Chancellorsville, were flank attacks, while others such as on Barlow Knoll the first day at Gettysburg or against the Emmitsburg Road on the second day involved a numerically superior force attacking badly positioned Union defenders.)

What accounts for the great shock effect of Confederate infantry attacks in the West? Sheer aggressiveness and elan has to be part of it: even attacks against breastworks that failed (e.g., Franklin, the Battle of Atlanta) were pressed with extreme vigor. (Peachtree Creek and to some degree Ezra Church and Jonesboro were exceptions). I would also surmise that the difference in performance in attacks on unfortified and fortified defenders demonstrates that the attackers’ fire was particularly accurate and heavy. Inflicting heavy casualties while advancing a defending force increased the odds of success. Entrenchments or barricades largely eliminated the ability of the advancing force to render large numbers of the defenders hors de combat.

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December 27, 2017

Vova the Squeegee Man

Filed under: Economics,Politics,Russia — The Professor @ 4:21 pm

My old buddy Vova is making a rather forced and pathetic attempt to persuade rich Russians to repatriate the money they have invested (squirreled away) overseas:

President Vladimir Putin is using the threat of additional U.S. sanctions to encourage wealthy Russians to repatriate some of their overseas assets, which exceed $1 trillion by one estimate.

I call the attempt forced and pathetic precisely because Putin feels obliged to try to persuade, rather than dictate. And because he is offering inducements:

Putin said on Monday that Russia should scrap the 13 percent profit tax on funds repatriated from abroad and renew an amnesty from penalties for businesses returning capital.

And because he’s raising the bogeyman of western sanctions (from the Bloomberg piece):

“We and our entrepreneurs have repeatedly faced unjustified and illegal asset freezes under the guise of sanctions,” Peskov said on a conference call Tuesday. “The president’s initiative aims to create comfortable conditions for businesses if they want to use this opportunity to repatriate their capital.”

Heretofore, sanctions have limited the ability of the affected entities to tap western financing: they have not involved expropriation or the kind of piratical corporate and government behavior that has been seen in Russia. Investments abroad remain abroad despite the more hostile environment to Russian money in the west because it is still safer than it would be in Russia. That’s why Vova has to beg and bribe to try to get Russians to repatriate. And previous efforts have hardly been successful:

Russia rolled out a similar amnesty program during the worst of the conflict in Ukraine, which coincided with a plunge in oil prices that triggered the country’s longest recession of the Putin era. That 18-month initiative, the results of which haven’t been disclosed, “didn’t work as well as we’d hoped,” Finance Minister Anton Siluanov said. Unlike that plan, this one waives Russia’s 13 percent tax on personal income, according to Dmitry Peskov, Putin’s spokesman.

Note that the mere threat of western sanctions has not been enough: hence the tax waiver.

Insofar as piratical corporate behavior is concerned, I give you Igor Sechin, ladies and gentlemen. What do you think is more intimidating, Sechin plotting–and the system cooperating–to jail a troublesome minister for eight years, or what the US and Europe have done to sanctioned entities? Or his serial extortions of Sistema, which recently agreed to an “amicable” settlement with Rosneft/Sechin? Said “amicable” settlement involved the former paying the latter $1.7 billion dollars to settle a suit . . . over what is rather hard to say. I still don’t get the legal theory under which Rosneft even thought it was entitled payment for Sistema’s alleged past wrongs. Given that this occurred mere days after Putin called for an amicable settlement, it is pretty clear that he was taking Sechin’s side and telling Sistema to cave–and do so with a smile.

This is why Russian money will stay out of Russia, Putin’s pleas notwithstanding.

Another story gives you a partial explanation for Putin’s neediness: “Russia’s Reserve Fund to be fully depleted in 2017.” The rainy day fund is empty, and the outlook remains cloudy.

Thus, for all the hyperventilating about Putin the Colossus, the objective basis for his power is shaky indeed. He can be a pest and troublemaker, but he lacks the economic heft to be much more. Yet for selfish political reasons, Democrats, NeverTrump Republicans, and the media inflate his importance daily. Enough. Putin is rattling his tin cup, hoping that some rich Russians will drop some rubles into it. Maybe if the tax inducement isn’t enough, he can squeegee their windshields.

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December 26, 2017

Agency Costs: Washington’s Augean Stables

Filed under: Economics,Politics,Regulation — The Professor @ 6:09 pm

In news that definitely added to my holiday cheer, a gloomy New York Times moaned that “[m]ore than 700 people have left the Environmental Protection Agency since President Trump took office, a wave of departures that puts the administration nearly a quarter of the way toward its goal of shrinking the agency to levels last seen during the Reagan administration.”

Given that the EPA is one of the most malign agencies in DC, every subtraction is an addition to America’s wealth–and no, this will not detract markedly, if at all from environmental quality. Or at least, any loss in environmental quality would not have been worth the cost necessary to achieve it.

The most signal achievement of Trump’s first almost year has been on the regulatory front. (The recent tax law arguably pips that.) The metastasizing regulatory/administrative state under both the Bush and Obama administrations is a detriment to prosperity, and in particular to the dynamism of the American economy. It is the engine of European-like sclerosis, and it badly needs to be brought under control.

Trump has begun–and only that–the task of cleaning this Augean Stables on the Potomac. The bureaucrats are none to happy, and are fighting back, mainly through classic bureaucratic guerrilla warfare. Unfortunately, they have advantages in this form of combat, and any progress will be achieved slowly, and only through unceasing effort. Those appointed to lead the agencies are often at a disadvantage in taming those who work for them even when they have a will to do so, and what’s more, all of the mechanisms of capture are at work here, meaning that agency political appointees are constantly at risk of going native.

The administrative state is a threat to prosperity and liberty, and a Constitutional anomaly, not to say monstrosity. Administrative agencies combine executive, legislative, and judicial functions, thereby threatening the separation of powers and associated checks and balances which are intended to prevent any single branch of government overawing the others. Indeed, in many respects the administrative state has become an independent branch of government, though not one formally established by the Constitution.

Moreover, it is not subject to the normal mechanisms of accountability. Yes, it is formally subject to Congressional oversight and some presidential control, and hence indirectly subject to the electorate, but due in large part to the scope and intricacy of the regulators’ responsibilities, there is a huge principal-agent problem: agency costs (as economists use the term) are a major issue with federal agencies. It is very difficult for Congress or the White House to control regulators. Further, information asymmetries make it inefficient to utilize high-powered incentives to get regulators to implement the wishes of those who formally control them. Civil service protections insulate bureaucrats from personal accountability for all but the most egregious misconduct (and sometimes not even then).

There is also a strong bias towards expanding agencies’ power. Several factors work in this direction, and few in the opposite way. Empire building is one such factor–regulators have a strong preference to expand their power. Congressional committees that oversee agencies also gain political power when the influence of their charges expand. (This shares some similarities with a mafia protection racket.) Government agencies attract people who are ideologically predisposed to expansive exercise of government power.

These asymmetries lead to a ratchet effect. Statist administrations–notably Obama’s, but to a considerable degree Bush’s as well–find allies in the administrative state who eagerly push their agenda. (Look at the CFTC in the Gensler years.) Less statist ones–like Trump’s–face a wearying battle of attrition to undo what had been put in place by previous administrations (and Congresses).

Legal precedents only make things more difficult. The Chevron doctrine (derived from a 33 year old Supreme Court decision) requires federal courts to defer to the judgments (I would not say expertise) of regulatory agencies in matters of statutory ambiguity and interpretation. This exacerbates greatly the agency problems, because since Congressional “contracts” (i.e., laws) are inherently incomplete (they do not specify regulatory actions in every state of the world), such ambiguities and necessities of interpretation are inevitably legion. And under Chevron, the federal courts can do little to rein in an agency. (Justice Gorsuch has criticized Chevron, and hopefully soon there will be an opportunity to reverse it or narrow it substantially.)

The administrative state is a progressive–and Progressive–creation. It reflects deep suspicion and skepticism about private ordering, and a belief in the superior knowledge and moral superiority of an expert class who should be protected from popular whims and passions, as expressed through election results, because those whims and passions are not the reflection of wisdom, knowledge, or dispassionate analysis. (If you want a sick laugh, look at Tom Nichols’ bleatings about expertise at @radiofreetom on Twitter.)  In the progressive worldview, the lack of democratic accountability is a feature, not a bug. Leave these people alone. They know better–and are better–that you!

The strongest case for some insulation of administrative agencies from more intrusive control by the Constitutionally-recognized branches of government is that this facilitates credible commitments: market participants, and citizens generally, know there will be some stability in rules and regulations, and can plan accordingly. But given the tendency to expand the scope of regulations, this translates into stability of overregulation.

There’s also something, well, Russian about a highly bureaucratic state, largely run by an unelected nomenklatura. Read Tocqueville’s descriptions of 19th century Russia and the 19th century US, and you’ll see that the administrative state leans far more towards the former than the latter.  I would also note that the bureaucracy is one of Putin’s strongest political pillars.

So the news that a few bureaucrats at the EPA are so disenchanted by Trump that they’ve up and quit is encouraging, but it’s at most a small victory in a big war. I have been encouraged by few other wins (e.g., on net neutrality), but the most I hope for is an elimination of some of the most egregious excesses of the Obama (and to a lesser degree Bush) years. The overall trend is towards a more powerful, insular, and unaccountable administrative state, much to the detriment of America’s freedom, dynamism, and prosperity.


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