Streetwise Professor

November 18, 2009

Potemkin Civil Society

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

I haven’t written anything about Medvedev’s State of the Nation speech because, to be quite blunt, there’s not much to write about.  In many respects, it is a piece with the entire genre: political cotton candy; a pastiche of platitudes.

One thing that struck me, though, was his discussion regarding civil society:

It is the government’s job to create the necessary environment for the development of civil society. People who are not indifferent to what is happening around them should benefit from every opportunity to realise their noble aspirations.

We will continue to support non-profit, charitable organisations that help resolve complex social problems. Corresponding amendments to legislation will be designed to simplify the operation of non-profit organisations that are engaged in charity work and help vulnerable social groups.

What will be done in this respect? First, we will introduce the concept of socially oriented non-profit organisations. Those who receive this status will be able to count on the government’s direct support. The authorities will be able to provide such non-profit organisations with financial, information and consulting support. But this is not all: what is no less important, they will receive tax incentives and governmental and municipal orders. It will be possible to transfer property to non-profit organisations for them to use in their work.

We intend to eliminate any tax on the material assistance provided by charitable and non-profit organisations to children without parental support, as well as to the disabled.

There is another suggestion. Services rendered by non-profit organisations in caring for the sick, the disabled, the elderly, and social services for orphans and children without parental support, will be exempt from VAT.

Neither will any income tax be taken from grant-supported projects such as health programmes, promotion of popular sports and physical education.

Another change in legislation that we have been talking about for years now concerns the creation and replenishment of special-purpose capital of non-profit organisations. This will become possible through donations of securities and fixed property (this conversation has been going on for some years now), and environmental protection will now be on the list of activities for which special-purpose capital can be used.

Third, we will finalise and adopt rules governing charitable activities. In particular, their objectives will include: the social rehabilitation of orphans and children without parental support, providing legal assistance, promoting scientific and technical creativity of children and youth, philanthropy and volunteering.

All of these things are quite admirable, of course.  It is particularly desirable to create and support independent organizations, if for no other reason but to demonstrate that people needn’t be dependent on the state for everything.  But what strikes me is the very cramped and narrow vision of acceptable activities for private organizations to engage in.  Russia certainly needs to encourage civil organizations to assist in the care and development of the orphaned and the aged, but it needs a much broader development of “little platoons” than that.  It needs a variety of civil organizations that can, in a sense, interface with the state and indeed compete with.  That can give citizens a voice against the state.  But Medvedev is completely silent on this.

Not that I am surprised.

To give a flavor of the attitudes of the Russian state to this type of civil society, consider this from Oleg Kozlovsky’s Facebook page:

Russian National Exhibition, a grand event organized by Russian government to attract US investment, opens in Chicago tomorrow. Russian bureaucrats and businesspeople will try to convince their American counterparts that it is safe and profitable to put money in Russia’s economy.

. . . .

The organizers of the Exhibition will not ignore the humanitarian aspect too. They even have a whole 2.5-hour long session on “Formation of Civil Society.” Five regional ombudsmen (from Samara, Yekaterinburg, Dagestan and Kabardino-Balkaria), an editor of an online paper and an unkown (to me) expert will be explaining how Russia develops its civil society. The apparent lack of any NGOs’ representatives speaks for itself: the government has no activists to show to their Western partners without loss of image.

That is: “civil society” is viewed as an appendage of the state, and representatives of the state speak on its behalf.  Little more needs to be said.

One other thing on the Medvedev speech.  He again condemned state corporations.  Stratfor argues that this is an opening salvo in a battle between the Surkov clan (plus the civiliki) and the Sechin clan (the siloviki).  Perhaps.  Although the orders to launch investigations of these corporations is something more than mere words, I think it is still premature to conclude that a real battle is underway.

November 16, 2009

Pot, Meet Kettle

Filed under: Economics,Politics — The Professor @ 10:03 pm

China’s chief banking regulator excoriated the United States Federal Reserve for its extremely lax monetary policy:

The US Federal Reserve is fuelling “speculative investments” and endangering global recovery through loose monetary policy, a senior Chinese official warned on Sunday just hours before President Barack Obama arrived in China for his first visit.

Liu Mingkang, China’s chief banking regulator, said that the combination of a weak dollar and low interest rates had encouraged a  “huge carry trade” that was having a “massive impact on global asset prices”.

The comments came as China and the US sparred at the Asia Pacific Economic Co-operation summit in Singapore over exchange rate policies amid rising international criticism that China’s currency is undervalued.

Mr Liu’s unusually blunt remarks underscore how China – the largest US creditor because of its massive holdings of Treasury bonds – has become a trenchant critic of monetary and fiscal policy in the US.

Since the start of the financial crisis, Chinese officials have issued a number of warnings that the US should not inflate away its mounting debt burden. Before these latest comments, however, Beijing had generally been most critical of US fiscal policy, urging Washington to spend less.

But speaking at a conference in Beijing, Mr Liu said the Fed’s policy of maintaining low interest rates together with the weak dollar posed a threat to the global economic recovery.

“[It] is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets,” said Mr Liu, who is chairman of the  China Banking Regulatory Commission.

“The situation has already encouraged a huge dollar carry trade and had a massive impact on global asset prices,” he added.

As the next sentence in the FT points out, however, China’s monetary policy is not exactly a model of probity:

However, Mr Liu’s criticism of the Fed comes as China’s own monetary policy is attracting growing scrutiny at home and abroad. Critics say the massive expansion in bank loans this year could cause asset price bubbles and inflation.

Qin Xiao, chairman of China Merchants Bank, last month said China “urgently” needed to tighten monetary policy to avoid stock and property market bubbles.

Evans-Pritchard in the Telegraph recapitulates some of the gruesome details:

The reality is that much of Beijing’s $600bn stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.

Credit has exploded. Allocated by Maoist bosses for political purposes, it has become absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53pc this year. Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.

Pivot Asset Management said lending has touched 140pc of GDP, “well beyond” levels that have led to crises in the past. With the revolution’s 60th birthday out of the way, the central bank has begun to tighten. New yuan loans halved in October. So be careful. Pivot said a hard-landing in China could prove as traumatic for world markets as the US sub-prime crash.

The world economy is still skating on thin ice. The West is sated with debt, the East with plant. The crisis has been contained (or masked) by zero rates and a fiscal blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough demand to compensate. It is adding supply.

My view is that markets are still in denial about the structural wreckage of the credit bubble. There are two more boils to lance: China’s investment bubble; and Europe’s banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle.

Both the US Fed’s policy and that of the Chinese make me cringe.  The Fed’s path, and US fiscal policy, are unsustainable.  Yes, the Fed may have a plan to tighten, but I seriously doubt that its commitment to implement this plan is credible, especially if the US government debt continues to explode.  This worries the Chinese, because of their accumulation of more than 2 trillion dollars in dollar-denominated assets.  Point taken.

But the Chinese stimulus policy is also clearly unsustainable as well, and demonstrably wasteful (e.g., building highways, tearing them down, building them again).  Indeed, the resource misallocations associated with the Chinese credit boom are palpably more acute than those that resulted from the Fed bubble of the mid-2000s.  Yes, we built too many houses and strip malls.  But the Chinese, it appears, are building too much of everything.  It is hard to imagine this ending with a smooth landing, rather than a crash.

The proper way to respond to distortions is not to create new ones.  As I argued in “The Michael Jackson Economy,” huge steroid injections can mask temporarily the adverse symptoms of previous policy-induced problems (arising, for instance, from the Chinese currency peg, US monetary policy, and perverse housing and accounting policies), but they tend to make the ultimate dislocations even more acute.  The mania for planning and controlling huge open economies will inevitably founder on their intricate complexity.  Canute was smart enough to know that he could not control the tides.  The Chinese and American monetary and fiscal authorities are victim of the conceit that they can control the economic tides, and we will pay the price when their conceit is revealed to be just that.

In sum, neither China nor the US have any business lecturing anybody, least of all each other.  Both are engaged in unsustainable policies intended to address short run (albeit severe) economic problems.  All they will succeed in doing is transforming short term problems into long term ones, into Japan writ large.

November 15, 2009

And You Thought You Needed Kahlua to Make a White Russian

Filed under: Politics,Russia — The Professor @ 9:20 am

Vladimir Putin gettin’ down with some Russian Eminem wannabes.  This brings to mind Ben Folds’ “Zak and Sara”:

she saw the lights
she saw a pale english face
some strange machines repeating beats and thumping bass
visions of pills that put you in a loving trance
that make it possible for all white boys to dance

And where did they find all the short kids to stand next to Putin?

And catch this hilarious quote:

“And breakdance is something peculiar,” he said. “This really is propaganda for a healthy lifestyle because it is hard to imagine breakdancing having anything to do with drinking and dope,” Putin said.

Yeah, really hard to imagine.

November 14, 2009

The Dangers of Cosmic Justice

Filed under: Military,Politics — The Professor @ 11:07 am

The Obama administration’s dangerous decision to try Khalid Sheikh Mohammed and 3 other Al Qaeda terrorists in Federal Court in NY is, in a way, quite clarifying.  Or, more accurately, the decision to try them in NY, and to try other Al Qaeda detainees in military tribunals is quite clarifying.  And what it allows us to see is very, very disturbing.

If Obama, Holder, and the Justice Department believed that it was a legal and Constitutional imperative to try terrorists detained at Guantanamo in civilian courts, then the administration would have terminated the tribunal process, and announced that all detainees would be tried in civilian courts on US soil.  Thus, their decision to follow different legal courses for different Al Qaeda detainees implies–necessarily–that there is NO legal obligation to try ANY such detainee in civilian courts.

That means, again as a matter of logic, that not being a decision driven by the law, it was a decision driven by ideology and/or politics.  Of the reasons that Holder cited in his announcement, all I can say is that they brings to mind what Orwell said:  “There are some ideas so  absurd that only an  intellectual could  believe them.”  That is, the reasons are utter abstractions completely divorced from the compelling practical realities.

This raises the question: what is the political calculation here?  Do I want to know the answer?

Thomas Sowell has forcefully argued against falling to the siren song of “cosmic justice.”  For no compelling legal or Constitutional reason–and the decision NOT to try all Gitmo detainees in Federal Court proves irrefutably that there is no such compelling reason–this administration is about to do just that.

One last remark: interesting, isn’t it, that this epochal announcement occurred when Obama is out of the country?  Quite a profile in courage.

Making Distinctions

Filed under: Military,Politics — The Professor @ 10:31 am

Two distinct issues in the Hasan atrocity have been hopelessly tangled: (1) What caused Hasan to do what he did?, and (2) Why wasn’t Hasan removed as a danger before he killed 13 people?

Re (1), there is a strong case to be made that Hasan’s religious beliefs were a decisive contributor to his decision to gun down his fellow soldiers.  But that’s neither here nor there when answering (2).  There was substantial debate among Hasan’s professional colleagues as to whether he was psychotic (or otherwise emotionally disturbed) or a potential terrorist or both.  Regardless of whether he was mentally ill or a jihadist or a mentally ill jihadist, it was abundantly clear that he was not fit to be in the US military, not fit to be a psychiatrist, and particularly not fit to be a US military psychiatrist treating soldiers who had fought jihadists.

So, why was he assigned to be a psychiatrist treating those fighting and killing those with whom he had expressed sympathy and support?  The only reasonable answer is political correctness.  Indeed, one of his erstwhile Walter Reed colleagues explicitly asked, in the context of one of these “what to do about [then] Captain Hasan discussions”,  “How would it look if we kick out one of the few Muslim residents?”

How does it look now?

It is abundantly clear in the aftermath of Fort Hood that the military let Hasan go on his merry, murderous way for reasons of political correctness.  A more difficult question to answer is why the FBI and the two (!) Joint Terrorist Task Forces investigating Hasan dropped the investigation (soon after the Obama administration took office) despite the evidence of his extensive contacts with a notorious jihad supporter, and jihad-sympathizing web postings by someone with the same name.

We need to know the answer to that question.  Right now.

November 12, 2009

Just So Stories: Financial Regulation Edition

Filed under: Derivatives,Economics,Energy,Exchanges,Financial crisis,Politics — The Professor @ 8:39 pm

All of the legislative proposals relating to over-the-counter derivatives would impose seismic changes on the way that these instruments are traded, and the performance risks related to them are managed.  Indeed, it is fair to say that these proposals, if implemented would dramatically shrink the OTC market, and perhaps destroy it altogether. Under either the House (Frank) or Senate (Dodd) bills, most derivatives would have to be traded on exchanges, and be cleared.  (Clearing is a way of mutualizing default risks.  At present, default risks in a particular contract are directly limited to the buyer and seller.)  (BTW, when you hear “Frank and Dodd” do you think Fannie Mae and Freddie Mac?  I do.  Does this inspire confidence?  Self-answering question.)   These efforts are strongly supported by Treasury Secretary Timothy Geithner, CFTC head Gary Gensler, and SEC head Mary Shapiro.

These legislative proposals are clearly predicated on a very strong belief: participants in the derivatives markets routinely chose the wrong institutional arrangements.  That this immense market is and was in fact arguably the largest market failure in financial history.

And these markets are indeed immense.  According to Bank of International Settlements data, notional (“face”) values of these instruments totaled $683 trillion in June, 2008 (right before the onset of the financial crisis), and their market values totaled $20 trillion (ballooning to $34 trillion by the end of 2008).

Moreover, these markets had grown dramatically over the years–at a double digit annual pace.  They also dwarfed the market for exchange traded (and cleared) derivatives.  The BIS reports that at the end of 2007, total notional values of outstanding contracts traded on exchanges were $28 trillion, which had shrunk to less than a mere $20 trillion at the end of 2008.  (I won’t go into the quibbles over the interpretation of these numbers, which make true apples-to-apples comparisons impossible.  Suffice it to say, difficulties of interpretation duly considered, the exchange traded markets are huge, but the OTC markets are HUGE.)

But our betters on Capitol Hill think that these collective results of the individual decisions of thousands of informed participants with major skin in the game are wrong, wrong, wrong.  They know better.  EVERYTHING should be traded on exchanges.  EVERYTHING should be cleared.  The emergent order is fundamentally flawed; a constructed one must be substituted for it by legislative fiat.

This assertion of systematic, immense market failure demands a coherent explanation.  It is, to be honest, quite hard to find one.  In this post and some that follow, I’ll examine some of the attempts at explanation.

Cliffs’ Note version of my conclusion: I’m still searching for a coherent story.

One of the most commonly heard stories is that OTC derivatives are enormously profitable for big banks due to the lack of transparency in the market.  Exchange trading and clearing would shrink profit margins, costing the banks big money.  So they have deliberately kept the market dark in order to enhance their market power and their profits.

Of course, all dominant incumbents want to maintain market arrangements that protect their market power and monopoly profits.  This is why GM is enormously profitable due its continued dominance of the automobile market.

Back to our regularly scheduled reality.

To justify the profit protection story, it is necessary to demonstrate the existence of entry barriers.  It is possible for banks to charge their customers supercompetitive prices persistently only if there is no possibility for competitors to undercut these prices (where the idea of “price” should be interpreted broadly to incorporate all of the costs that customers pay to trade derivatives.)  There are, however, strong reasons to believe that such entry barriers don’t exist, or aren’t sufficiently strong to explain the dominance of the OTC markets.

Let’s consider for a minute the legislative proposals.  They want to force trading onto exchanges.  They believe that this trading will be cheaper and more efficient due to greater transparency and competition, and share default risks more efficiently, than the current OTC markets.  But exchanges already exist.  For years they have been striving mightily to make inroads into the OTC derivatives markets.  Futures brokerage firms have also been trying mightily to market their services to the customers of OTC dealers.  Exchanges have launched head-to-head competition in many areas–and failed miserably in most of them.

If exchanges are really cheaper, because OTC dealer banks exercise market power and charge supercompetitive prices, why haven’t the exchanges made greater penetration?  Why haven’t they drawn business from the OTC dealers?  Why has the market share of OTC derivatives grown?

I’ll wait.  Barney?  Chris?  Tim?  Gary?  Mary?  [Humming quietly to myself.]

Put differently: the alternative market arrangement that the DC crowd says is more efficient and cheaper has been available to the allegedly poor, exploited customers of dominant dealers for years, and they’ve chosen to trade with the dealers nonetheless.  How to explain this?  Battered spouse syndrome?  Masochism?  It is a puzzle, no?

But it gets better.  There are many markets in which virtually identical products trade OTC and on exchanges.  In many of these markets, consenting adults knowingly choose to trade the uncleared, bilateral OTC contracts.  Why would that be if OTC markets are beset by market power that inflates the costs that customers pay?

Moreover, there are cases where clearing has developed organically in an OTC market without the benefit of a government mandate.  Most notably, clearing has grown dramatically in OTC energy derivatives since 2003.  This demonstrates that clearing can succeed competitively where customers want it.  This undercuts the idea that clearing (or exchange trading) is at an inherent competitive disadvantage relative to OTC dealer.  Ironically, and tellingly, this development has occurred precisely when the firms that dominate the OTC financial markets–e.g., Goldman Sachs, J.P. Morgan, Morgan Stanley, and other big banks–began to dominate trading in OTC energy derivatives.  How come they didn’t strangle the clearing baby in the crib to create and protect a privileged position in the energy markets?

In sum: there have been vigorous attempts of the putatively cheaper, more efficient exchange trading platforms to enter the market, suggesting that entry barriers do not preclude such competition.  These competitive efforts have often failed, and have certainly failed to displace OTC trading.  Where given a choice, customers sometimes choose cleared or exchange traded products–and oftentimes don’t.

Which calls into serious, serious question the received story as to why the inefficient, opaque, market-power ridden OTC market has survived and thrived. Instead, this “explanation” appears to be yet another of the many Just So Stories that have proliferated in the aftermath of the financial crisis;  a superficially plausible explanation that does not withstand scrutiny.

But on the basis of such Just So Stories, we are supposed to countenance the complete re-engineering of the world’s financial markets.

[Cross posted at Organizations and Markets.]

November 11, 2009

My First O&M Guest Post

Filed under: Uncategorized — The Professor @ 4:35 pm

Peter Klein and his colleagues at the excellent blog Organizations and Markets have graciously invited me to guest blog, and cross-post here.  Here’s the O&M link, and here’s the piece:

On the Border*

This is my inaugural post as guest blogger here at O&M.  I am grateful for the opportunity.

In his very gracious introduction, Peter Klein noted that my research is at the border of finance and industrial organization.  Quite true (and indeed, “borderer” is a good description of me overall.)

That border is very, very busy today.  Indeed, so much is happening there that it is difficult to keep up.  In the aftermath of the financial crisis, Congress and regulators are beavering away on laws and regulations that will completely reshape the organization and regulation of financial markets, and especially of the area of particular interest to me–derivatives.

I anticipate that many of my O&M blog posts will explore these issues, but I’ll start with something very topical.  Senator Chris Dodd just yesterday heaved up a 1136 page proposed financial regulation bill, and one proposal that is attracting considerable attention is his plan to consolidate banking regulators.  Dodd is not alone in thinking along these lines.  Even before the financial crisis, there were myriad proposals to consolidate various regulators, such as the Securities and Exchange Commission and the Commodity Futures Trading Commission.  These have only gained in popularity in light of the crisis.

In the modern financial markets, firms are big and complex, and operate in many markets (defined geographically, or by product).  It is difficult to fit a big financial firm into any box.  A Goldman Sachs deals in the securities markets and the derivatives markets.  So it doesn’t fit comfortably in a securities box, or a derivatives box, so in the current system for regulatory purposes the firm is split into pieces, some of which are put into the securities box and others into the derivatives box (and there are many other boxes too for a big firm like Goldman).

This leads to potential for conflicting regulations, jurisdictional disputes, regulatory arbitrage, and other problems.  So, the Dodd proposal–and most of the other consolidation proposals–advocate creating really big boxes, and in the extreme, one big box that regulates everything a financial firm does.

The problems of the seen are well known (though arguably exaggerated).  What concerns me are the largely unexamined problems of the as yet unseen big box alternative.

Economic theory can shed some light on these problems.  Specifically, any government agency multitasks.  The CFTC, for instance, regulates the financial health of futures brokerages and polices market manipulation.  The more expansive the agency, the more tasks it will perform.  Thus, regulatory consolidation exacerbates multi-tasking problems.

Moreover, any agency has multiple principals, including Congress and the White House.  Moreover, even within Congress there are multiple different constituencies that view themselves as principals.  The more expansive the regulatory agency, the more principals it will have; more Congressmen will perceive an interest in the activities of the agency because it will regulate a larger array of firms operating in more districts.

Agency theory tells us that multi-tasking agents working for multiple principals face serious incentive problems, and that given this, it is the interest of the principal(s) to subject the agent to very low powered incentives.  Indeed, assigning the agents more tasks and subordinating the agent to more principals generally requires (in a second best arrangement) a reduction in incentive power.  Weaker incentives, in fact, than those that regulators currently face.

Thus, Congress will find it in its interest to subject an uberagency that regulates everything that breathes (financially speaking) to very low powered incentives.  This translates into an agency that is highly bureaucratic, sluggish, unresponsive, (fill in additional pejoratives here).

Regulators hardly covered themselves with glory in the lead up to the crisis.  Does anyone really believe that a single, even less incentivized super regulator is likely to do any better?  Has anyone who matters even asked the question?

* With apologies to the Eagles.  And Taco Bell.

Read Mossy’s Comment

Filed under: Economics,Politics,Russia — The Professor @ 7:44 am

Commentor Mossy–a resident of Russia–has provided an excellent comment on the Brittleness post.  The description of the current situation in Russia captures the atmospherics of a pre-revolutionary situation, which s/he compares to the (pre-revolutionary) situation in the 1980s.

Thanks, Mossy.

November 10, 2009

Brittleness

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 9:26 pm

Pavel Baev makes a point I’ve emphasized repeatedly: change destabilizes the Russian natural state.  As a result, they system is brittle, and Medvedev’s questioning of the entire basis for the state and the country’s economy could have catastrophic consequences:

The conclusion that the Byzantine political system built (or rather re-built) by Putin is incompatible with modernization appears both impossible and irrefutable. Medvedev dares not to utter one word of criticism directed at his co-ruler and waffles over the need to build a team of modernizers who could make at least a few innovations indeed happen (Nezavisimaya Gazeta, October 30). However, he constantly spells out the proposition that the conveniently corrupt business-as-usual is over, and this message -hesitantly conveyed by the official media- gradually becomes a catalyst for the growing sense that a period of change has arrived yet again (Moskovsky Komsomolets, November 3).

This perception gained more ground after Medvedev’s strong condemnation of Stalin’s crimes that appeared first on his video-blog and was then broadcast by all television channels. Insisting on re-examining the repressions, he went against the widespread desire to close those dark pages in Russian history and also challenged the tendency towards “rehabilitating” Stalin, which was carefully cultivated by Putin (Nezavisimaya Gazeta, November 2). This step signifies a risky departure from the policy of saying only things that people want to hear, since for large groups of “patriots” Medvedev has instantly become a “traitor.”

The divide within society over Soviet history connects directly with the splits on the way out of the current crisis, which were illustrated by the ambivalent celebrations of the November holidays. There were perhaps as many ultra-nationalist rallies as officially sponsored festivities on the recently established Day of National Unity, while the communists brought thousands to the streets on the Great Revolution Day. Still, a healthy 63 percent of respondents affirmed that they would celebrate neither day (www.levada.ru, October 29).

The rising momentum of change makes the political elites edgy about setting and switching their loyalties. The more Medvedev is trying to argue (as in a recent interview with Der Spiegel) that “today, there is no doubt that our tandem, as we are commonly referred to, is working rather coherently,” the more doubts arise about its future. Commentators and economic experts pondering the pseudo-liberal discourse and budgetary populism increasingly describe the situation inside the Kremlin as panic (Vedomosti, November 2; www.gazeta.ru, October 21).

In this turbulent environment, Putin wants to position himself as a “rock” of confidence standing against the ill-conceived “innovations,” asserting at every meeting of the government that “our plans are still alive and well, and they will continue and be completed. There is no doubt about it.” He can hardly fail to see, however, that time is not on his side, and the central question of the leadership acquires critical urgency well before the presidential elections in 2012. Medvedev might think that time is working for him, but re-inventing himself as a champion of change is an order much taller than his limited intentions, which he will present this week in an address to the parliament. He fancies “modernization” as an evolutionary and certainly non-violent process over which he would preside benevolently disallowing any “excesses.” The problem is that the strength of the thoroughly corrupt system of power to which Medvedev belongs entirely is in its rigidity. Thus, opening it up for transformation – even if only by words – could trigger a spontaneous collapse. The Berlin Wall is an object lesson in such a breakdown, and Medvedev may find himself to be merely the weakest part of the wall of fear and lies that Putin has built. [Emphasis added.]

Twenty years ago, Gorbachev was the Sorcerer’s Apprentice who, convinced that the Soviet system needed to be changed in order to survive–and to realize Lenin’s vision(!)–unleashed forces that he could not control.  The Soviet system was grossly inefficient, but it had an internal coherence and a set of self-supporting norms and institutions.  Attempting to change some of these, while retaining the essence (a one party state), destroyed this coherence and caused its collapse in short order.

Medvedev’s vision is somewhat similar.  He wants to change some of the system–notably, its reliance on extractive industries and its innovative backwardness–but retain a dominant state led by a bureaucratic elite operating through an overawing party.  But these goals are largely incompatible.  Like Gorbachev, Medvedev–or anyone–could never control what a wave of creative destruction would destroy.  The state structure and the resource dependent economy are highly symbiotic.  The resource dependent economy creates the rents that feed the state and its rulers.  A truly entrepreneurial economy creates sources of power that challenge the incumbents.  (Heck, even a resource economy with truly independent firms does this; which is why Khodorkovsky had to be destroyed.)  The economic side of the arch supports the political, and vice versa.  Disrupt the economic side, and the political side is likely to fall.

Hence the panic at the thought that Medvedev might play Sorcerer’s Apprentice.  Putin is much more realistic on this score.  He clearly understands that this is not like ordering from a Chinese menu–one item from column A and another from column B.  It is a package deal.

The main difference is that Gorbachev was in a position to do something, whereas Medvedev’s position is much more ambiguous and tenuous.  Moreover, having seen this movie before, the apparatchiks will be loath to embark on another socio-politico-economic experiment.  As Twain said of the cat that sat on a hot stove: it will never sit on a hot stove again, but it won’t sit on a cold one either.  Hence, it is highly unlikely that Medvedev will be able to secure the internal support necessary to act on his vision–even if he has the intestinal fortitude to try.  The gulf between his words and deeds suggests, furthermore, that he truly lacks that too.

The most likely outcome is for Putin and Putinism to prevail.  As deadening as its effects are, it is still an internally coherent system (as are natural states generally).  It works to the benefit of those in power, and it has atomized the population to such an extent that the risk of popular revolt is remote (though not non-existent).

It is not, as I’ve written, immune to collapse especially under conditions of economic stress that undermine the rents that hold it together.  But better to run that risk, than to run the much greater risk of trying to implement changes that are inherently destabilizing. Therefore, I would expect that as long as Medvedev is just talk, Putin and the siloviki will tolerate him despite the angst that this causes.  If Medvedev actually tries to act on his words, however, his days would almost certainly be numbered.  Those with vivid memories of the “greatest geopolitical catastrophe of the century” will not countenance another Sorcerer’s Apprentice run amok.

The Military’s Diversity Fetish

Filed under: Military,Politics — The Professor @ 8:18 pm

In the military, it is common to conduct “lessons learned” reviews to determine what went right, and especially what went wrong, in a particular operation (or exercise).  These are supposed to be thorough, and spare no one.  Tragically, the Army’s Chief of Staff, General George Casey, is strongly signaling that there will be a concerted effort not to learn lessons from the Fort Hood slaughter.

Rather than even acknowledge the serious questions now raised by an accelerating avalanche of evidence that Major (that word sticks in my craw) Malik Hasan was openly sympathetic to violent jihad, and openly opposed to US military action in Muslim nations, Casey is strongly signaling that the Army will circle the wagons, and go into a full defensive crouch to protect its hallowed diversity efforts:

Lieberman’s comments were in stark contrast to  U.S. Army chief of staff  George  Casey, who told  CNN he’s deeply worried “that the speculation could cause something that we don’t want to see happen.”

“It would be a shame – as great a tragedy as this was – it would be a shame if our diversity became a casualty as well,”  Casey said.

The former Iraq war commander said on ABC that focusing on Hasan’s religious roots might “heighten the  backlash” against all Muslims serving in the armed forces.

Casey further refused to concede that the Army had “missed” the danger posed by Hasan.  Un-freaking-believable.  Uhm, what should have been the first clue?  There are so many, each one sufficient to raise significant concern, that it is impossible to deny that the Army had, in fact, completely missed it.

The excessive concern about a hypothetical danger–backlash against Muslims–and the refusal to countenance one that has proved all too real–that posed by jihadist sympathizers in uniform–is utterly foolish.  Yes, I understand that invidious racial and cultural discrimination undermine unit cohesion and morale.  I further understand that the US military had debilitating racial problems in the 1970s, and has made remarkable strides to reduce them.  I therefore readily acknowledge that active efforts to combat invidious discrimination are important and valuable.

But I also understand that fetishizing anything almost always leads to perverse outcomes, and Casey’s statements indicate that the military has fetishized diversity to a point where it is posing a threat to the lives of service personnel, and their ability to complete the missions assigned them.

The fetishist is incapable of rationally evaluating the costs and benefits of the object of his adoration.  It becomes an absolute; it has only good attributes, and and nothing bad can come from it.  Even when the obsession is highly destructive, those in its thrall cannot recognize this.  Instead, they will engage in whatever mental contortions are necessary to attribute bad outcomes to anything but the fetish.

Large organizations are very susceptible to this problem.  It is well known that institutional cultures are necessary to coordinate the behavior of the large numbers of individuals work in the institution.  Moreover, to serve as a coordinating device, a culture or set of norms must impose rewards for adhering to its tenets and costs for deviating from them.  Fetishes and taboos serve this function.

The military is, obviously, a very large organization, and the institutional culture is rife with rituals that teach its norms, and rewards and punishments to enforce them.  Fetishism is a very real threat in such an environment, and can be extremely counterproductive at times.  The examples are innumerable, but one that comes to mind is the French fetishization of The Offensive prior to the First World War.  This mindset led the French to launch attacks that saw tens of thousands mowed down before machine guns; the fetishization of the belief led them to continue their forlorn assaults even after it was obvious that they were pointless and accomplished nothing than make widows and orphans by the gross.

Casey’s response–and the response of the government more generally (e.g., the dim bulb Homeland Security Secretary Janet Napolitano, the FBI agents that played Alfred E. Neuman–“what, me worry?”–when investigating Hasan’s term paper outreach to Al Qaeda) make it abundantly clear that the military has fetishized diversity.  This has blinded it to the threat posed by jihadi sympathizers in its ranks.

The “backlash” concern is fundamentally one of false positives.  Hasan was the false negative from hell.  Whenever making judgments under uncertainty, it is inevitable that one has to trade off false negatives against false positives.  The military’s fetish has made it incapable of doing so.

Moreover, (a) its concern about false negatives is overstated, and (b) its attempt to suppress the obvious is likely to fuel even greater suspicion of Muslims within its ranks.

Its concern about false negatives is overstated, because there are numerous ways of identifying the potentially egregious cases like Hasan without casting a general suspicion on Muslims.  I dunno, but contacting Al Qaeda operatives, expressing sympathy for enemies who are trying to kill American soldiers, and publicly stating a higher loyalty to Islam (rather than the United States and its military) all seem like sufficient reasons to separate an individual from the service–or to impose more severe sanctions–and would not constitute a blanket condemnation of Muslims.  (Indeed, separation would seem to be a mutually beneficial transaction.)  To the contrary, it would indicate the Islamic faith is perfectly consistent with military service, unless one transgresses some rather obvious lines.  Contacting the enemy, or expressing a sympathy for them, or expressing conflicted loyalties, are all non-denominational transgressions.

Moreover, failure to draw these lines despite the demonstrated danger of doing so is a morale killer.  Military people understand the culture, and realize that it is necessary to put up with a certain amount of “chicken shit” (more politely referred to as “Mickey Mouse”) that makes no sense in order to maintain the institution’s coherence; small irrationalities are necessary to maintain the coherence of the whole.  But when it is demonstrated that certain norms have become fetishized to the point of dysfunction, the leadership’s continued worship is extremely demoralizing: how could it be otherwise when one is committed to life and death situations under the command of those who have lost their grip on reality (or whose perspective on what is important is so warped that their judgment is extremely impaired)?  What’s more, this can only lead to a broader resentment of Muslims in the service more generally by making them a privileged class immune from the scrutiny that other soldiers would experience if they do the same things.  Few things are more debilitating in large organizations than double standards.

Furthermore, Casey is betraying a very low opinion of those under his command.  He apparently thinks that they harbor ugly bigotries right below the surface, and are incapable of distinguishing between soldiers of whatever race or creed that do their duty, and those that sympathize with–and perhaps support–those they are supposed to be fighting.

That tacit disrespect is also a morale killer.

I have a little personal experience with the mindset.  As a plebe at the Naval Academy in the late-1970s, we were subject to diversity training.  (I can’t remember whether that was the buzzword de jour, but it all amounts to the same thing.)  Several times during the summer, we were required to attend either brigade or summer battalion (can’t remember which) assemblies in which we were harangued by what are now styled diversity consultants.  The message was quite explicit: everybody is a racist, and racism will rear its ugly head at the first opportunity.  Re-education is necessary to ensure that these tendencies are purged.

I have a very distinct recollection of one of the break-out sessions that each company had with its company officer.  It was the second year in which women were in the Academy, so the focus of this session was sexism.  One of my classmates made an unfortunate remark about Amazons.  The company officer turned on him viciously.  He said: “That remark is not just sexist, it is racist!”  (Note the labeling, the accusation without even asking for explanation or giving an opportunity to clarify.)  My hapless classmate–remember, a 17 year old kid–was nonplussed (and panicking), and asked how that remark could possibly be considered racist.  The company officer, demonstrating a cluelessness truly remarkable from somebody who had gone through nuke power school, said: “Because everybody knows that people who live in the Amazon are not white.”  I remember fighting the almost reflexive urge to roll my eyes.  I mean sheesh, how could somebody be so (a) ignorant (not to know that the Amazons were Greek mythological figures), and (b) incredibly confident in their superiority that they could make such an asinine statement with such condescension.

The whole exercise made it very clear that (a) the operating assumption behind the entire policy was a belief that everyone is a latent racist, and (b) that the military would come down brutally on anyone who vocalized any opinion that bore even the slightest possibility of being interpreted as racist or sexist.  The former betrays a fundamental disrespect.  The latter contributes to fetishization; those willing to become true believers stay, survive, and thrive, while those who aren’t, leave (e.g., yours truly–though this was only one of the straws on the camel’s back for me).

Casey’s response makes it abundantly clear that the diversity fetish has become counterproductive.  It leads to beliefs so at odds with reality that those not in its thrall lose respect for authority, and not just on this matter, but more generally.  If Casey is worried about backlash, he should worry about this: that his diversity fetish will discredit the entire concept and undermine the progress that the military has made since Viet Nam.  Acknowledging realities and making reasonable adjustments will not weaken the military; failure to do so will make the military’s current leadership the modern equivalent of the out-of-touch chateau generals who sacrificed thousands to their fetish.

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