Streetwise Professor

Ralph Peters is extremely PO’d at the US Army for its complicity in the Fort Hood carnage:

When the terrorist posts anti-American hate-speech on the Web; apparently praises suicide bombers and uses his own name; loudly criticizes US policies; argues (as a psychiatrist, no less) with his military patients over the worth of their sacrifices; refuses, in the name of Islam, to be photographed with female colleagues; lists his nationality as “Palestinian” in a Muslim spouse-matching program, and parades around central Texas in a fundamentalist playsuit — well, it only seems fair to call this terrorist an “Islamist terrorist.”

But the president won’t. Despite his promise to get to all the facts. Because there’s no such thing as “Islamist terrorism” in ObamaWorld.

And the Army won’t. Because its senior leaders are so sick with political correctness that pandering to America-haters is safer than calling terrorism “terrorism.”

. . . .

But Hasan isn’t the sole guilty party. The US Army’s unforgivable political correctness is also to blame for the casualties at Ft. Hood.

Given the myriad warning signs, it’s appalling that no action was taken against a man apparently known to praise suicide bombers and openly damn US policy. But no officer in his chain of command, either at Walter Reed Army Medical Center or at Ft. Hood, had the guts to take meaningful action against a dysfunctional soldier and an incompetent doctor.

Had Hasan been a Lutheran or a Methodist, he would’ve been gone with the simoon. But officers fear charges of discrimination when faced with misconduct among protected minorities.

Now 12 soldiers and a security guard lie dead. 31 soldiers were wounded, 28 of them seriously. If heads don’t roll in this maggot’s chain of command, the Army will have shamed itself beyond moral redemption.

There’s another important issue, too. How could the Army allow an obviously incompetent and dysfunctional psychiatrist to treat our troubled soldiers returning from war? An Islamist whacko is counseled for arguing with veterans who’ve been assigned to his care? And he’s not removed from duty? What planet does the Army live on?

For the first time since I joined the Army in 1976, I’m ashamed of its dereliction of duty. The chain of command protected a budding terrorist who was waving one red flag after another. Because it was safer for careers than doing something about him.

If the stuff about Hasan’s arguing with his patients is true, how can you possibly explain this statement by one of his superiors?:

[A]t Fort Hood, Kimberly Kesling, the deputy commander of clinical services, remarked: “Up to this point, I would consider him an asset.”

There are none so blind.

But what is the Army’s first response?  A review to see if more force protection is required! I kid you not:

Army Chief of Staff George Casey has asked Army leaders across the country to review force protection measures after the shooting rampage at Fort Hood, Texas, left 13 people dead.

Unless “force protection” is defined to include “eliminating the deliberate obtuseness  induced by excessive political correctness  to clear and present dangers,” this exercise will be a joke and 13 soldiers will have died in vain.

Not that I am surprised to hear this coming from Casey.  He was one of the primary architects of the disaster that loomed in Iraq pre-Surge.  (Force protection and cultural sensitivity were his mantras there too.)  In an unbelievably stupid move, emblematic of George Bush’s misplaced sense of loyalty, Casey was kicked upstairs to the Army Chief of Staff job, where he proceeded to interfere with Petraeus at every turn.  This latest action in response to the Fort Hood murders provides additional evidence that Casey is the flag officer of (unflattering) stereotype: an unimaginative careerist CYA pro.

What happened at Fort Hood demands an unblinkered, soul-searching evaluation of the institutional failings that led up to it.  And to be quite blunt about it, (a) people like General George Casey are almost certainly not the ones to do that, and (b) the Obama administration will have almost no interest in doing so, for reasons too numerous–and too obvious–to mention.  Hence, I expect this event to be buried in a blizzard of therapeutic obfuscatory gobbledygook that will add insult to the injury that those soldiers suffered at the hands of a man who should have been dishonorably discharged–or worse–long before.

They’re both virtually uninsurable:*

Political risk insurance premiums have risen across emerging markets in the last year, fueled by rising resource nationalism and unrest linked to the financial crisis as well as a renewed concern over risk amongst investors.

Foreign direct investors use the political risk insurance market to buy protection against nationalization, expropriation, political violence or capital controls preventing convertibility of earnings. It generates some $1.5 billion in premiums each year.

. . . .

RUSSIA ALMOST UNINSURABLE

Madagascar, Ecuador, Kyrgystan and others have also seen examples of expropriation or effectively forced renegotiation that have worried insurers. However, in some other countries — such as Brazil or South Africa — a slight rise in leftist rhetoric has had less impact on premiums.

The industry is particularly concerned over risks in Russia, where extractive projects have become almost uninsurable.

BP (BP.L) faced a difficult battle for control of its local joint-venture TNK-BP last year, but problems have not been limited to the oil sector and Norwegian telecom Telenor faced a similar battle this year over its stake in mobile operator Vimpelcom.

“The main difficulties seem to be in any sector you can describe as strategic,” said Elizabeth Stephens, head of credit and political risk analysis at London insurance broker Jardine Lloyd Thompson.

No doubt the “We’re Not the Worst!” crowd that routinely pipes up in response to any criticism of Russia and Putin will seize on the fact that another ex-Soviet basket case is in the same, uhm, basket:

Buying coverage for investment in Ukraine has also become almost impossible, she said, as the country struggles with both financial and economic crisis. Ukraine’s state gas firm Naftogaz defaulted on a $500 million Eurobond last month before restructuring.

Take your solace where you can get it, I guess.

Looking at the roster of other virtually uninsurable countries–Bolivia, Venezuela,  Madagascar, Ecuador, Guinea, and Kyrgystan–should be a source of deep shame for proud Russians.  But we are routinely bombarded with harangues about the restoration of Russia’s power and its assuming its proper place in the world, all led by that stalwart avenger of Russia’s humiliation, Vladimir Putin.

But what has he really accomplished?  To turn Russia into an economic pariah (to all except the Germans in their current at-your-feet mode) condemned to economic purgatory for the foreseeable future.  The radioactivity of Russian political risk is a striking testament to the true wages of Putinism.

But in this era of hyperactive, grasping government, America should take heed Russia’s lesson:

The huge increase in Western government intervention in financial markets following the global crash had also prompted some firms to worry about the risk of expropriation in developed economies, Zurich’s Roorden said.

“We’ve had some enquiries about the United States, mainly concern over the risk of nationalization as governments take extraordinary measures due to the crisis,” he said.

We’re nowhere near Russia on this score yet, but the journey to hell begins with the first step.  The actions of the US government with respect to major banks, the automakers, and perhaps, health care insurers and providers, raise questions about the vulnerability of property rights in this country too.

* And I bet you were thinking, “Uhm, drunk drivers?”

The next time somebody whines about how the West exploited Russia after the fall of The Wall, and didn’t offer any meaningful economic assistance, ask them about this:

To say that Russia is hesitant about tackling climate change is putting it mildly. The last time the world tried to get the country’s cooperation on the issue was in 1997, during negotiations for the Kyoto Protocol (the international treaty on limiting greenhouse-gas emissions). Because Russia is the world’s third largest source of emissions after the U.S. and China, the accord would have failed without it. So the treaty was written in a way that would allow Russia to keep polluting as much as it wanted and grant the country billions of dollars in emissions allowances to sell to other countries that needed to meet their Kyoto commitments.  (Read about getting air traffic under control.)

As a U.N. official who participated in the talks put it, “Russia got the sweetest deal: free money, no restrictions.” But apparently even that wasn’t enough. It took another seven years of painstaking negotiations — and promises from the West to help Russia join the World Trade Organization (WTO) — to get the country to ratify the deal.

Note: not a US official, but a UN one said this.

Ann Althouse raises similar points those in my “Death by PC?”:

I want to know why what was wrong with Hasan was not detected? Was he given a pass  because he was Muslim? Is there a fear of suspecting or offending Muslims in the military that keeps people who should see signs of dysfunction from acknowledging what they see or doing anything about it? On the other hand, if it really is the case that people in the military are  harassing Muslims, that too should not be ignored. There should be rigorous equality for Muslims. It shouldn’t even be necessary to point out what is obvious: Muslims in the military shouldn’t experience special treatment  eitherof a positive or a negative kind.

Let us not, out of sympathy for the victims, shy away from examining the military’s failings. This should not have happened, and the sphere of responsibility extends beyond the murderer. This is not an expression of sympathy for Hasan. It is a desire for an effective military.

Read the comments too.  Quite a few very good ones.

I welcome Gillian Tett’s recognition that clearing is not the silver bullet–or the “magic wand”–that will make financial crises a thing of the past.  This bit is particularly spot on:

What is notable about the reform debate this year, is that there has been remarkably little public discussion among politicians – or among regulators – about how to guarantee that any future clearing house will be strong enough to withstand future shocks.

In part, that silence may reflect a lack of imagination. Politicians and regulators have never seen a situation where a clearing house has collapsed; leaving aside one small exception in the commodities world a few decades ago [not quite right: the Hong Kong Clearing Association failed in 1987, and the CME and CBT clearinghouses were under extreme stress too], that has never happened before. However, I suspect the silence may also reflect delicate political sensibilities. If politicians were to demand that a clearing house should be so utterly rock solid that it could withstand financial Armageddon, the future members of any clearing platform would have to make massive financial commitments. That would necessarily limit membership to a small cabal of ultra-powerful banks – not something that most politicians wish to encourage.

However, if a clearing house is made more accessible to a wider pool of members, then it will only have credibility if it is backstopped by the government itself to ensure that trades are always settled. Most politicians are not keen to highlight that option either, given the wider sense of public anger about the degree to which the government is bailing out the financial world.

Tett is in fact too kind about the lack of public discussion.  Politicians–most of whom, truth be told, couldn’t explain to you how clearing actually works, and probably hadn’t even heard of it a year ago–have seized on the clearinghouse as a cure all.  There has been virtually no serious discussion of the economics of clearing, or the economic implications of clearing mandates.  Much of the discussion has been notably distorted and misleading; Timothy Geithner and Gary Gensler have been particular guilty of this.  Nobody has answered (and arguably, nobody has seriously asked) why clearing has not been adopted heretofore, and why non-cleared products have grown relative to cleared ones, if clearing is so great.  (And no, I don’t count the superficial “it will cut the banks profits” argument.)  Instead, clearing is a deus ex machina, invoked to resolve all the thorny issues involved in financial market structure.

Tett’s statement that memberships in clearinghouses lacking a government guarantee would limited to a “cabal of ultra-powerful banks” illustrates the inanity of much of the debate.  We need clearing to permit big banks to share counterparty risk because big banks are too interconnected.  Huh?

The alternative she poses–government guarantees of clearing–is truly scary.  We need to find ways of weaning the system off the government guarantees that currently exist, and which are the main source of moral hazard-induced systemic risk, rather than look to find new things to guarantee.

Tett is sympathetic to clearing, as is indicated her invocation of the lack of the failure of a major clearinghouse.  This is a weak argument, however, because the market structure–and crucially, the choice of clearing vs. bilateral arrangements–is endogenous.  Clearing has been adopted where conditions favor it.  The fact that it has worked in these areas does not imply it will work equally well with other products and other participants.  Indeed, it is quite possible that mandating clearing for products/participants for which it is not well adapted (as indicated by the failure to adopt it voluntarily) will make things worse, rather than better.

Tett’s concluding paragraph makes an important point:

One lesson that financial history shows is that the issues which blow up the financial system are not usually those which caused the last crisis; instead, the biggest threats tend to come from the areas swathed in a lazy consensus, or where there is a strong political impetus to clutch at easy solutions. That might yet apply to the clearing houses. In theory, I still believe that clearing houses could – and should – make the derivatives world safer. In practice, though, they could end up creating new dangers if they are not put on a sound footing – particularly if the fact that no clearing house has ever failed before creates a false sense of security.

We need a serious examination of the costs and benefits of alternative market structures.  Sadly, this has been completely absent.  Instead, we have had superficiality masking as deep analysis; cheerleading instead of critical appraisal.  This will not end well, because, as Tett notes, such superficiality leads to the false sense of security that lays the groundwork for the next crisis.

I have been a Cassandra on this issue for some time now.  It’s good to have some company, even if Gillian Tett still has too rosy a view of clearing for my taste.  But the fact that at least somebody is questioning the conventional wisdom is encouraging.

A couple of other clearing stories that deserve mention.  First, incredibly, Barney Frank has endorsed NJ Rep. Stephen Lynch’s amendment to regulate clearinghouse ownership structures:

Mr. Frank said he hopes in part to address potential conflicts of interest at clearinghouses with a provision pushed by Rep. Stephen Lynch (D., Mass.) that would limit big banks’ controlling stake in clearinghouses to 20%. That provision was included in the bill, but hit a procedural hurdle recently and had to be removed.

“We are encountering resistance to that on the part of many, including my colleagues in the House Agriculture Committee,” Mr. Frank said of the Lynch provision. “As I believe it is important to reduce the stake in the clearinghouses of these firms…I continue to support Congressman Lynch’s amendment.”

WTF was I thinking when I said something nice about this dangerous, dangerous man?  The man who, more than any other, is responsible for the Fannie and Freddie fiasco (the costs of which make the expense of AIG pale in comparison).

Second, and an excellent counterpoint to the Lynch-Frank effort to micromanage the ownership of clearinghouses, LCH.Clearnet has completed a restructuring that gives large banks more control:

The clearer said on Friday that with the redemption finalised, large users now owned 63 per cent of the business, up from 37 per cent. LCH.Clearnet defined large users as those which contributed more than 1 per cent towards group clearing fees and which together represented, in aggregate, more than 80 per cent of the group’s clearing revenues.

LCH.Clearnet is now owned 83 per cent by users of its services and 17 per cent by  NYSE Euronext and the London Metal Exchange.

Sixty-five shareholders, including Euroclear Bank, a unit of Euroclear, the settlement services group, have had their shareholdings either redeemed or “significantly reduced”.

The total number of LCH.Clearnet shareholders is now 105, down from an earlier 120.

Most of LCH.Clearnet’s “large” users are also members of the bank consortium – codenamed “Lily” – that abandoned its takeover attempt last month, largely because the LCH.Clearnet scheme largely satisfied its demands for greater control of the clearer.

The consortium had wanted control of LCH.Clearnet largely for its SwapClear interest rate swaps clearing business, turning the clearer for the London Stock Exchange, Euronext and the London Metal Exchange into more of a clearer of OTC derivatives.

Interesting, isn’t it, how market participants with experience and skin in the game are doing the exact opposite of what politicians who don’t want them to do?  This should at least raise questions as to why market participants favor a mutualized structure with a rough equivalence between risk exposure and control.  Could it be because this offers serious efficiency advantages?  But no, all we get from financial sophisticates like Frank and Lynch is superficial bleating about “conflict of interest.”

Reading all this makes this quote from Hayek (which serendipitously Russ Roberts reminded me of yesterday) all the more apropos:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

When it comes to politicians and regulators, Hayek’s phrase should be amended to say:

The curious task of economics is to demonstrate to politicians and regulators how very, very little they really know about what they imagine they can design.

If corroborated, the numerous stories that Fort Hood murderer Malik Hasan openly expressed jihadist sympathies and that this was known to law enforcement authorities and to his comrades in the Army, raise the distinct possibility that the dead and wounded were victims of political correctness as well as Hasan.  Fears of offending; fears of being perceived as intolerant; fears of transgressing the invisible lines of the politically acceptable; all plausibly permitted a patently unsuitable individual to remain in the service, and to be in a position to act out his jihadist hatreds.  I daresay that the career of anyone who dared to challenge Hasan’s statements and beliefs would have been in more jeopardy than Hasan’s was for his making and holding them.

It suggests that the best way for a jihadist to escape official scrutiny is to be quite open about his beliefs.

The event also shows that the safest place for a mass shooter is in a “gun free” zone.

Vladimir Putin is whining, predictably, about the GM board’s decision to terminate the sale of Opel:

“We will have to take into account this style of dealing with partners in the future, though this scornful approach toward partners mainly affects the Europeans, not us,” Putin told a cabinet meeting in Moscow. [nL5471607]

“GM did not warn anyone, did not speak to anyone … despite all the agreements reached and documents signed. Well, I think it is a good lesson.”

Wah, wah, wah.  Here’s more:

Prime Minister Vladimir Putin lashed out at General Motors on Thursday after a Russian-backed bid to buy carmaker Opel fell through, hinting that there may be repercussions down the road because of GM’s “disregard for its partners.”

“Nobody warned anybody about anything,” Putin said, referring to the surprise decision by the U.S. company not to sell its European unit. State-owned Sberbank and parts maker Magna had made preliminary agreements to buy the European carmaker, with GAZ Group named as a potential industry partner.

“Everyone was notified after the fact, despite the agreements that had been reached and the documents that had been signed, including legal ones,” Putin said.

The board’s ruling “doesn’t harm our interests, but it shows a rather peculiar communication style that our American partners use with their counterparts,” Putin said. “This is a good lesson. … We must take into account this kind of cooperation with our partners in the future,” he said, adding that the decision primarily showed disrespect to GM’s European partners.

“Peculiar communications style.”  Priceless.

Putin should recognize that the real lesson here is that the only way Russian companies were in the running for a piece of Opel at all was because of political machinations and a combination of bribery and blackmail (by the Germans, in cahoots with the Russians), rather than a rational economic calculation.  While nursing his hurt ego (when somebody says “it doesn’t hurt me” you can bet it really hurts), Putin should consider why the prospect of partnering with Russian firms is so repulsive that it is necessary to rely on such means to prevail.

Here are a couple of other priceless gems from other Russian winners.  First, from our old buddy Oleg Deripaska:

The problematic deal with Opel, with its international political overtones, is wrapped up in the “superstitions of the U.S. State Department,” Mr. Deripaska earlier told the Russian press. The State Department has denied Mr. Deripaska a visa to visit the U.S., although he recently visited the country in cooperation with the Federal Bureau of Investigation and met with Detroit executives.

I guess that Detroit meeting was a real success, huh, Oleg?  (BTW, it is pretty disgusting that the FBI acted as an intermediary in this way.  This whole episode deserves a lot more scrutiny that it has received.)  And just where did those superstitions originate?  It must be a trial to be so misunderstood.

And here’s the reaction of a United Russia parliamentary official:

“The motivation, it seems to me, is very simple: to keep Opel within the zone of political and economic influence of American business and American politics,” said Oleg Morozov, deputy head speaker in the lower house of Russian parliament for Mr. Putin’s United Russia Party.

The paranoia is so thick you could cut it with a knife.

Until these attitudes are replaced by a more critical appraisal of the reasons for Russian companies’ unattractiveness to potential foreign partners, the country can count on remaining in Putin’s purgatory.  Have fun with that.

Almost a year to the day after my No Joy in Mudville post that mused whether there would be a huge backlash if the Democrats attempted to achieve their long suppressed policy dreams (e.g., healthcare, cap & trade), the elections in Virginia and New Jersey (and very especially the former) provided the most persuasive evidence that such a backlash is indeed occurring.   The Virginia results were eye popping.   There are almost NEVER 20 point margins (or thereabout) in statewide elections for major offices in competitive states.   Especially given that Virginia was considered the best example of an Obama-inspired political realignment. The meaning of the results couldn’t be more clear–to everyone but KookAid Nancy, perhaps.

Rational political calculation would dictate that Democrats regroup and downsize their ambitions.   But we are talking about Pelosi, Reid, et al, so it may be an oxymoron to use the word “rational” in this context.   There is a very distinct possibility that this gang will see the window closing on their cherished dreams that seemed so tantalizingly close to reality, and mount a political Kamikaze mission in an last desperate attempt to save them.

Note well.   Pelosi will not be climbing into the cockpit.   She’ll be delivering exhortations on the glory of dying for the Emperor.   Nor will the 190+ Dem Reps in safe, Gerrymandered seats, or the 40+ Dem Senators in heavily Dem states (although the Corzine result may cast doubt on the last statement).   They’ll be standing along the tarmac, yelling Banzai!

No, it will be the 50 odd Democrat Reps in swing districts (mainly in southern states) and a handful of Dem senators (also in southern states) whom Nancy and Harry will be goading and cajoling and guilting into taking that ceremonial drink of sake, strapping on the flight helmet and the funereal headband, and heading out with enough fuel for the one way mission that will end with the immolation of their political careers.

The question is whether political survival instinct will rule the day, or whether political pressure fair and foul will.   Given the species, I figure the former, but one can never be sure.   If party solidarity prevails, this nation will be in for a mid-term election like none ever seen before.   It will make the 1994 contest look like a walk in the park.

General quarters, folks.   It’s going to be a helluva year.

For my adage: the greatest lesson of the Great Depression is that we learned the wrong lessons about the Great Depression.   Krugman’s (wrong) lesson?:

It took the giant public works project known as World War II — a project that finally silenced the penny pinchers — to bring the Depression to an end.

The lesson from FDR’s limited success on the employment front, then, is that you have to be really bold in your job-creation plans. Basically, businesses and consumers are cutting way back on spending, leaving the economy with a huge shortfall in demand, which will lead to a huge fall in employment — unless you stop it. To stop it, however, you have to spend enough to fill the hole left by the private sector’s retrenchment.

Beyond the creepiness of confusing mass destruction with creation, Krugman’s analysis is inane, not to say insane.   It highlights the dangers of obsessing on a single data point, and using a single episode to draw broad (and arguably universal) conclusions.   Put differently, the monomaniacal focus on the Great Depression blinds Krugman to the obvious reality that it is the exception rather than the rule.   By ignoring its exceptional nature, Krugman goes seriously astray.

Both its severity and its duration make the Great Depression exceptional.   Market economies had endured other downturns before, some (like the one of 1920-1921) nearly as severe at the outset as the 1930-1940 depression.   But in these earlier episodes, after a period of months or years, economic activity rebounded, usually without any massive fiscal intervention.   Similarly, post-War recessions did not endure for extended periods.

The temporary nature of previous (and subsequent) declines casts doubt on the kinds of Old School Keynesian (“OSK”) (not even neo-Keynesian) stories that Krugman is trying to tell.   In particular, it casts doubt on the reality of an autonomous collapse in “aggregate” demand (driven by animal spirits) that can last indefinitely, absent some external, fiscal demand stimulus to offset it, and which is immune to monetary policy.     That is, these OSK musings are explanations crafted to explain a single data point, but they don’t hold up in broader samples.

Which should raise the question: Why was the Depression exceptional?   It couldn’t be the lack of fiscal stimulus–which had been lacking in, say, 1920-1921 too, and in other episodes as well.   Relatedly: Could policy errors (e.g., interference in the price system that impeded adjustment to shocks, bad monetary policy) have made this particular depression a Great one?

By advocating a massive additional stimulus today based on his reading of the “lessons” of the Great Depression, Krugman also implicitly assumes that the conditions that contributed to the Great Depression’s severity are present today.   Even if one believes that the Great Depression was a Keynesian event that required a massive fiscal stimulus to end, that doesn’t imply that the current recession (severe by post-War standards, but mild compared to the Big One) is a Keynesian one as well.   Moreover, differences between the structure of the world economies then and now are so great, and the precipitating events are so different, that it is extremely dangerous to argue by analogy.

I’ve written before that it is my impression that business cycle theorists of all stripes have made the intellectual error presuming that all cycles are alike.   (EG., my recollection of Lucas’s macro course in which he said that a review of Mitchell’s work on quantifying business cycles had convinced him that they were so similar that they likely had a common cause).   Before swallowing Krugman’s recommendations for A Stimulus on Meth, it would be advisable to ask: (a) Is Krugman’s analysis of the Great Depression correct?, and (b) Is the analogy between the Great Depression and current circumstances an apt one?

The answers to both questions are most likely “no.”   The validity of the Old School Keynesian theory of depressions is dubious enough for the Great Depression, and its general applicability even more so.     Given these serious doubts, we would be fools indeed to embrace Krugman’s nostrums.

GM has finally come to its senses and rejected the sale of Opel to Canadian autoparts maker Magna–and its Russian partner (initially Sberbank, but eventually Avtogaz Gaz).   GM initially agreed to the deal when faced with an existential crisis in the early part of this year; its “choice” of partner was largely driven by Germany’s conditioning of financial support for the deal on GM selling to the Canadian-Russian tandem.   GM got cold feet in the summer, as its bankruptcy/government takeover and cash-for-clunkers gave it a financial respite.   It was explicitly reluctant to get involved in a deal that could lead to the loss of its technology and intellectual property to a potential Russian competitor; no doubt it was also reluctant (though it did not say so publicly) at the prospect of getting enmeshed (as a minority partner) in the financial and business machinations of Oleg Deripaska, victor in the bloody aluminum wars, unscrupulous businessman, and arguably the world’s largest insolvent.  Moreover, recent statements by the EC called into question Germany’s ability to condition its subsidies to favor factories located in Germany at the expense of others in Belgium, Spain, and the UK.

The decision of GM’s board to maintain control of Opel touched off howls of protest from Germany–and Vladimir Putin.   Putin was outraged that GM would act in such a high-handed way.   A deal is a deal, after all–if it works in Russia’s favor.   Putin made heavy hints that Russia would explore legal options.

Cry. Me. A. River.

Actually, the irony here is too rich for words.   Let’s remember the narrative that justified the rough treatment of Shell a few years ago.   When Russia was on its knees, the story goes, opportunistic oil companies exploited Russia’s economic desperation by forcing it to enter into humiliating production sharing agreements that were tilted heavily against the Russians.   In the mid-2000s, the worm had turned, oil prices had risen dramatically, Russia was no longer on its knees, and it redressed the injustices inflicted on it during its time of troubles by forcing Shell (through regulatory thuggery) to tear up the PSAs and sell its interest in Sakhalin at Putin’s price.

Fast forward to 2009.  GM is on its knees.  Russia–with the connivance of a German government facing re-election–takes advantage of the company’s distress to enter into an agreement that it would never countenance under other circumstances.  Months later, its hour of desperation past, GM reconsiders the deal and tells Putin to pound sand.

Tell us how it feels, Vladimir Vladimirovich.

But note one crucial difference: unlike Shell and Russia, GM had not signed on the dotted line.  It backed out before it had entered into a binding legal obligation.

An interesting lesson in corporate governance that Putin might well heed.  A board of directors overrules its management.

Truth be told, there are no truly sympathetic figures in this saga.  A company (GM) that wasted tens of billions of dollars in capital over decades.  Its overprotected, overpaid, unionized labor force.  A government (Germany’s) attempting to buy votes by subsidizing an industry plagued by overcapacity that should shrink, and doing so in a beggar-thy-neighbor fashion, all the while providing assistance to an opportunistic, corrupt Russian government and business that has co-opted wide swathes of the German political and economic elite.

This is an embarrassment to Germany’s Merkel, but one which hopefully will get her to reconsider her rather mystifying obsequiousness towards Putin and Russia.  But it is a particular embarrassment to Putin, for it is a very public demonstration that only the desperate (or the deluded or the corrupted) are willing to respond favorably to his blandishments.

Some would take this as an opportunity to contemplate what changes would make his country attractive to anyone but those with no other option.  But this surely will not happen in Putin’s case.  Instead, we can expect a litany of whines about how the Europeans and Americans are making Russia a pariah.

Actually, VV, no help needed: you’re doing a bang up job of that all by your lonesome.