Streetwise Professor

Last summer, Army and FBI “terrorism investigators” reviewed Army Major Nidal Hasan’s email correspondence with Anwar al-Awlaki, and concluded it was all hunky-dory for a serving American officer to discuss jihad with a known advocate of anti-American terrorism (and a man who had associations with some 9/11 hijackers).  It was “research,” dontcha know.  Now, the Obama administration has decided that Awlaki is a sufficient threat to warrant his being placed on a list of those approved for targeted killing.

I know that a handful of Army officers who served with Hasan were disciplined for failing to take action against him.  Yes, they failed in their duty.  But I have yet to hear that either the Army or FBI investigators who gave a pass to Hasan’s exchanging mash notes with Awlaki  have been sanctioned, and their dereliction was far worse; after all, it was their specific duty to identify terrorist threats.  Nor has the military (or the administration) dealt adequately–or at all–with the rot of political correctness that almost certainly, in my view, created the atmosphere in which Nasan’s superiors and the investigators felt it to be the safer course (professionally) to let him turn jihadi before their eyes, rather than raise the alarm.

Awlaki didn’t go bad overnight.  He was an identifiable bad actor well before he was in touch with Hasan.  His ascension to a shoot-on-sight list just confirms how bad he really is–and was.  It also is an implicit acknowledgement of the Army’s and the FBI’s inexcusable error in judgment in failing to act against Hasan once his email exchange with Awlaki came to light.  But no one, it appears, is being held accountable for this.  And that, too, is inexcusable.

My post on Gold Bugs from last week drew a lot of comment at SeekingAlpha.  It was largely predictable, tiresomely so.

Life being short, and the effort pointless, I won’t respond to the invective, insult, insanity, etc., all of which validated my judgment that it is an exercise in futility to engage in these matters.  But there is one thing that strikes me as so funny that, at the risk of unleashing another torrent, I have to write about it.  (Maybe I should hedge myself, by buying shares in Kraft, the manufacturer of KoolAid.)

Specifically, one of the supposedly shocking! shocking! discoveries that proves, proves I tells ya, that the precious metals markets are manipulated is that the amount of claims on gold exceeds the physical supply of gold.  As an example:

Continuing on the trail of exposing what is rapidly becoming one of the largest frauds in commodity markets history is the most recent interview by Eric King with GATA’s Adrian Douglas, Harvey Orgen (who recently testified before the CFTC hearing) and his son, Lenny, in which the two discuss their visit to the only bullion bank vault in Canada, that of ScotiaMocatta, located at 40 King Street West in Toronto, and find the vault is practically empty.

. . . .

It appears that this kind of lack of physical holdings by all who claim to have gold in storage, is pervasive as the actual gold globally is held primarily in paper or electronic form. Lenny Organ who was the person to enter the vault of ScotiaMocatta, says “What shocked me was how little gold and silver they actually had.” Lenny describes exactly how much (or little as the case may be) silver was available – roughly 60,000 ounces. As for gold – 210 400 oz bars, 4,000 maples, 500 eagles, 10 kilo bars, 10 one kilogram pieces of gold nugget form, which Adrian Douglas calculates as being $100 million worth, which is just one tenth of what the Royal Mint of Canada sold in 2008, or over $1 billion worth of gold. As Orgen concludes: “The game ends when the people who own all these paper obligations say enough and take physical delivery, and that’s when the mess will occur.”

. . . .

It is funny that central bankers thought they could take the ponzi mentality of infinite dilution of all assets coupled with infinite debt issuance, as they have done to fiat money, and apply it to gold, in essence piling leverage upon leverage. They underestimated gold holders’ willingness to be diluted into perpetuity – when the realization that gold owned is just 1% of what is physically deliverable, you will see the biggest bank run in history.

Maybe this is one of those things that just crept up on us “gradually” (the explanation of Adrian Douglas).

Yeah, if by “gradual” you mean “since the middle of the 17th century.”

What has the Bugs Gang so exercised is, in effect, fractional reserve banking in gold.  Which started in the middle of the 17th century.  Indeed, fractional reserve banking started in the gold market.

The story goes that in response to expropriation by King Charles I of gold stored in the Tower of London, holders of gold deposited metal with goldsmiths.  The goldsmiths issued receipts for the deposited gold, and soon recognized that they could engage in a lending business because the gold owners’ demand for return of the physical metal was usually only a fraction of the gold that had actually been deposited.  Thus, fractional reserve banking was born.

No doubt the Bugs are mainly skeptical of fractional reserve banking generally, and not just in gold.  And there have been a variety of arguments for requiring 100 percent reserve backing for certain kinds of bank liabilities, in particular, that fractional reserve banking is subject to runs/crises.  But there are benefits to liquidity and maturity transformation (inherent in fractional reserve banking), and the survival of the institution that achieves this transformation suggests that the benefits exceed the costs.

But regardless of where you stand on the issue of fractional reserve banking generally, you look pretty foolish when you consider it to be a shocking revelation that gold warehousemen engage in the practice.  I mean, they’ve been doing it only for the last 450 350 odd years.

After doing his Rip Sewell/Bill “Spaceman” Lee imitation at the Washington National’s home opener while wearing a White Sox cap, Obama was asked about his favorite White Sox players:

BHO: You know, uh… I… thought that, uh… you know, the truth is that a lot of the Cubs I like too. But I did not become a Sox fan until I moved to Chicago. Because I, uh… I was growin’ up in Hawaii. So I’ve actually been an Oakland As fan. But, when I moved to Chicago, I was livin’ close to what was then Kaminsky Park, right? And went to a couple of games, and fell in love, and the nice thing about the Sox is it’s real blue-collar baseball. You know, we always tease about the Cubs, they, you know they’re up at Wrigley… sippin’ wine, playin’ those day games, they’re havin’ a good time…

Note he couldn’t actually name any White Sox players, any “blue collar” heroes, past or present.  What’s more, note the rationale for claiming allegiance to the Sox. This simultaneously pegs the lame-o-meter and the pose-o-meter.

As a third-generation Cubs fan, I can say that yes, particularly beginning in the 1980s, the Cubs were widely perceived as the team of the upscale, the yuppies, the corporate crowd.  This reputation is deserved: when I went with my Dad to a Cubs game a couple of years ago (a loss, of course) it bugged both of us no end that (a) the tickets were extremely expensive, (b) most of the fans who paid these prices weren’t paying the slightest attention to the game, and (c) those that were had no clue as to what was going on (e.g., yelling on routine fly balls as if they were about to rocket onto Waveland or Sheffield).  For most of the crowd, it was a social event, conspicuous consumption, rather than an athletic contest.  (Yes, I am becoming a sports curmudgeon.)

The Sox are the anti-Cubs.  Just as there are legit Cubs fans, there are legit Sox fans whose allegiance is not chosen as a social statement.  But those who want to identify themselves as more urban, more hip, will sometimes choose to become Sox fans–or affect being Sox fans.  For such people, wearing Sox gear is an affectation, an advertisement, a statement (“I’m an edgy urbanite, not a gauche suburbanite”). (The Sox have consciously played to this, e.g., the black caps/uniforms.)

Obama is quite clearly such a person, and he all but admits it in what I quoted above.  The whole Obama White Sox thing is just another piece of a persona, deliberately chosen to convey an image, a perception.  It is, in other words, quintessential Obama.

As is his rationalization for his performance:

The president suggested his accuracy would have improved with a longer outing.“If I had a whole inning, I’m telling you, I would have cleaned up,” he quipped.

Would it kill him to admit “Well, I just suck at baseball”?  Is he so invested in his own ego that he has to be great at everything? I know that politicians are narcissists, but this guy is off the charts.

Update.  John Kass at the Tribune takes a few gentle whacks.

* This is the characterization of my elder daughter, a pretty good softball pitcher (wicked drop, especially), who quite definitely does not throw like a Barack Obama (as demonstrated by the swollen index finger on my glove hand, every spring and summer, from about the time she was 11.)

Every time I (or a commentor) says something negative about Russia’s recent trajectory and future prospects, like night follows day a few (you know who you are!) say: But look at the rising birth rate!  It’s the all purpose response.

This article from WindowOnEurasia presents some statements by Russians, including the first deputy chairman of the Duma health committee, the essence of which is that the recent uptick in the birth rate is not the harbinger of a demographic turnaround, or a sign that Russia’s demographic problems are behind it.  A few choice quotes:

Another participant in the press conference, Nikolay Gerasimenko, the first deputy chairman of the Duma health committee, said bluntly that “the birthrate will fall whatever we do,” despite the uptick that has been observed in the last four years as an echo of higher births in 1985-1990 (slon.ru/articles/344217/).

The Duma official said that he “expects high birthrates to continue for two more years, [but] unfortunately since December [2009], there has been a slowing of the birthrate.” As a result, since that time, officials have concluded that “mortality has exceeded berths by 22,000, driving the population down.

. . . .

“Unfortunately,” he continued, “the birthrate will fall [in Russia] whatever we do.” Fertility rates are unlikely to go up beyond 1.5 to 1.6 children per woman, a rate that does not guarantee replacement. And because so many of the mothers are ill, “they give birth to ill children,” whose life expectancies are less.

. . . .

In a comment on these issues, Anatoly Vishnevsky of the Higher School of Economics tells “Kommersant” . . . . “despite the positive tendencies of birth and death rates which have been noted in recent years, ‘the levels achieved are all the same far from what is wanted.’” Moreover, they are short term, and “the euphoria connected with [them] is unjustified.”

Vishnevsky says his pessimism reflects long term trends. Since 1910, “not a single generation of Russians has reproduced itself.” Since 2004, the number of women of reproductive age has fallen, and since 2007, “for the first time in a long period began the contraction of the number of people of working age.” He added that these trends will “rapidly accelerate.”

Consequently, the Moscow scholar concludes, “the single real resource for preventing the decline of the population is immigration. “There is no other,” he told “Kommersant,” and “if Russia does not want to lose its competitive position, it must find its place” in a world where “large-scale international migration” is the norm rather than the exception.

I would be interested to read data-driven, empirical responses to these claims.  In particular, to the statements that the rise in the birth rate is a temporary blip, and that the “euphoria” regarding this uptick is unwarranted.

Back in January, Tool Time star Tom Friedman lamented that Mr. Cool Awesome* had turned his back on the “amazing, young, Internet-enabled, grass-roots movement he mobilized to get elected.”  Friedman all but begged Obama to spur entrepreneurship and innovation:

Obama should launch his own moon shot. What the country needs most now is not more government stimulus, but more stimulation. We need to get millions of American kids, not just the geniuses, excited about innovation and entrepreneurship again. We need to make 2010 what Obama should have made 2009: the year of innovation, the year of making our pie bigger, the year of “Start-Up America.”

How’s that working out for you, Tom?  With all the taxes on capital in the health care law, and the implicit tax on business expansion in the law (e.g., insurance mandates on companies with more than 50 employees), and all the taxes to come (there are murmurs of a VAT), it is becoming the year of Shut-Down America.  The whole Obama program is poison to entrepreneurship.

And that’s just the start.  Dodd’s banking bill explicitly targets startups:

Dodd’s bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the S.E.C. to review their filing. A second provision raises the wealth requirements for an “accredited investor” who can invest in startups — if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000). The third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states.

And just what are the apparatchiks in the SEC going to do in that 120 days?  Just what knowledge and expertise can they bring to bear in evaluating the funding plans?  The question answers itself; this adds costs and delay, for no perceivable benefit.  And what reason is there to restrict the free flow of capital from consenting adults with over $1mm to startups?

The American system of financing entrepreneurial startups is one of the world’s wonders.  It has played a central role in stimulating amazing technological innovation that has brought us amazing new products and contributed to substantial productivity growth in the ’90s and ’00s.  It is in no way implicated in the financial crisis.

So if it ain’t broke, why mess with it?  [That’s the family friendly version.]

As Mrs. SWP says, this is so European, which makes it part of a trend.

The most fascinating question is the political economy one: whose interest is served by this provision?  The most likely explanation is that incumbents–including, no doubt, one-time startups–having made theirs prefer to make it harder for others to displace them.  They liked creative destruction on the way up, but the idea of being swept away in some future gale is far less appealing.  So hobble potential future competitors, future creative destroyers, by increasing the costs startups incur to raise capital.  This pernicious provision also gives advantages to big investors, venture capitalists, and existing companies who would face less competition in supplying capital to potential startups.

As Lily Tomlin said: “No matter how cynical you get, it is impossible to keep up.”

*Edited in deference to a real Mr. Cool.

Barney Frank stomped his little feet in anger at the fact that his former senior staffer Peter Roberson decamped to become a lobbyist for ICE.  Frank has barred Roberson from contacting staff for as long as he is head of the Committee.  House rules preclude Roberson from contacting staff for a year.  Wouldn’t it be sweet, I mean ironic, if the the year long bar, rather than the as-long-as-Frank-chairs-the-committee restriction turned out to be the binding constraint?

I had some dealings with Roberson late last summer.  He contacted me about my interest in, and availability for, testifying about OTC derivatives in front of the House Banking Committee.  I indicated that I would be interested and available, but about a week later Roberson told me that Frank did not want me to testify.  (Imagine that.)

Said personal rejection by Frank I wear as a badge of honor.

Ralph Peters considers why Russia has not been able to “crush” its Islamists.  He also analyzes why Russia feels compelled to wage a bitter battle for a backwards corner of the old empire inhabited by poor and largely ignorant people who are truly alien to most Russians:

After 300 years, the Russians are still seen as occupiers — and see themselves as such. Yet Putin can’t bear the thought of letting Daghestan or Chechnya go — for two reasons: As a rabid nationalist, he won’t give up another inch of the Russian empire. And he fears that letting one small territory secede might trigger a rush for the exits on the part of other frustrated Russian regions.

Yes, nationalism, imperialism, and reputational effects are part of the Russian (and Putin’s) bloody minded determination to keep Chechnya and neighboring Daghestan and Ingushetia in the Russian Federation.  But remember, this is not only a Putinist determination.  Yeltsin, who was content to let the USSR collapse, and who didn’t thirst to maintain Russian hegemony over the wreck of the USSR (and the Russian Empire), launched the first Chechen War.  The motive for this war in the Caucasus lies at the heart of the Russian state.

There is something more going on here, and that something is energy.

With the construction of the Baku-Novorossiisk bypass in 1999, and the Azerbaijan-Georgia pipeline, the pipe through Chechnya was not the sole route by which Azeri oil could be transported.  This reduced Chechnya’s direct relevance in the oil game, but Chechnya borders Daghestan, and Daghestan borders the Caspian.  In the 1990s the war in Chechnya threatened to spread to Daghestan, and even today, Daghestan is rent by violence.

The division of the Caspian and its massive energy riches has been stalemated for years.  There are competing proposals on how to divide the Caspian seabed.  The Russian one would base the division on the length of coastline.  Without Daghestan, Russia’s claim would shrink by almost 80 percent.  Clearly not acceptable to a natural state whose elite subsists on resource rents, and which views energy as the key to its retaining at least a simulacrum of great power status.  So, poor, backwards, and essentially non-Russian Daghestan is a vital to Russia’s energy ambitions.  And since an independent, Islamicist Chechnya would destabilize Daghestan, it is war to the knife in Chechnya and its environs.

In brief, the overriding reason that the Russian government fights so ferociously for Chechnya (but really for Daghestan), is the overriding reason it does most everything: energy rents.  And it is willing to do so even though that routinely brings the war to Russia proper, at the costs of hundreds of lives.

In the aftermath of the Moscow Metro bombings, Russians should consider whether “????? ?? ?????” is such a good deal after all.

A recent FT had a fascinating article on Gazprom.   Many of the company’s challenges are well known: declining production, reduced demand in Europe, increased world supplies, pressure on its traditional pricing mechanism.  What makes the FT article particularly interesting is its extended discussion of the internal domestic challenges to the company’s dominance.  Challenges led by your fave and mine, Igor Sechin.  (If, as the one State Department intelligence guy told me, Lavrov is fascinating in the same way a tarantula is fascinating, in what way is Sechin fascinating?  One shudders at the thought.)

Ever since Mr Sechin became deputy prime minister in charge of the energy industry, pressure has been mounting on Gazprom to cede more of the domestic market to independent gas producers. Mr Sechin, who also serves as chairman of Rosneft, a state oil major that has long been eyeing the gas industry, supports a government proposal for legislation that would force Gazprom to cede its pipeline monopoly and grant independent access to the network, people familiar with the situation say.

That effort stalled after the financial crisis hit. But Rosneft and Novatek, another independent producer seen as close to Mr Sechin, have been making gains in the domestic gas market as Gazprom production falls, freeing up capacity in the pipeline network. The growth of Novatek, now Russia’s second-largest gas producer, could signal bigger changes.

It is not yet clear whether the rise of Novatek – where output grew in volume by more than 11 per cent last year even as that of Gaz­prom fell 18 per cent – is part of a Putin strategy to boost competition in order to increase Gaz­prom’s efficiency or a distribution of assets among the clans who jostle for Kremlin influence. “It might look messy but they are creating another big independent to rival Gazprom. Putin likes to keep tension among the clans. It is almost Stalinesque,” says one industry executive. “Will the government go for increased competition like with Novatek, will it be a restructuring of Gazprom, will there be a change in some of Gaz­prom’s management, or further industry consolidation?” he asks. The only thing that is clear is that “if nothing happens, there will be a further demise”.

. . . .

We believe Novatek’s rise is a result of the government and Sechin in particular telling Gazprom, ‘you will make room for independent gas’. A year ago, I thought Gaz­prom would have told them to sod off,” Mr Stern of the Oxford institute says. Instead, as Gazprom’s production fell, capacity freed up in the pipeline for independent producers and the process of allocating it became a “Sechin-selective exercise”, he adds.

. . . .

Most observers agree Mr Sechin is moving in on Gazprom. “He is fighting Miller’s clan and he’s looking for a way in,” says one industry executive. The emergence of Rosneftegaz in the Kovykta talks is “an indication of the state of flux in the Russian system at the moment, and of the disarray because of the erosion of Gazprom’s position”, another insider said.

The shadowy Gennady Timchenko of the even shadowier–and shadier?–Gunvor also makes an appearance, through his connection with Novatek.

One interpretation of all this: Gazprom’s weakened position has created an opportunity for Sechin and Timchenko (allegedly closely connected to Putin) to elbow in on the company’s once unassailable position.  It is also interesting to contemplate what this means in a broader political sense, inasmuch as Medvedev was affiliated with the Gazprom camp.  Moreover, as the article suggests, this power struggle could be a harbinger of disequilibrium in the natural state.  Such uncertainty is dangerous, as it could escalate into something that destabilizes the delicate balance within the ruling structures.

This is another challenge that Putin faces, along with the just-audible murmurs of doubts in the aftermath of the subway bombing and the continuing economic challenges.  Although the Russian economy is recovering, its manufacturing recovery is far less robust than that in the rest of the world.  The March Russian manufacturing PMI came in at 50.2, indicating growth, but barely, in contrast to the world manufacturing PMI of 52.9, indicative of relatively strong growth.

(Speaking of the bombings, I was astounded to see Putin traipse off to Venezuela to pal around with Chavez in their immediate aftermath.)

The FT article also notes that Gazprom’s ills have major fiscal consequences for the Russian state, given that the company accounts for 8 percent of the government’s revenues.

No wonder Putin is even testier and more shrill than usual these days.

The only solace, perhaps, is the continued strength in the price of oil, and relatively strong Russian oil output (which just set a record).  (The record output demonstrating that, as I wrote last year, Russia would pump as much as it could and rely on OPEC to restrain output to keep prices high. )  But even the high oil price is not an unalloyed benefit, given its effect on the ruble, and the knock on effects of that on the rest of the Russian economy (like the manufacturing sector, recovering only anemically as just mentioned).

One last thing about the article.  It highlights the clear antagonism and rivalry between Sechin and Gazprom.  Not that this is news, but makes me think again of how colossally boneheaded it was for BP to approach Sechin for help in dealing with in dealing with Gazprom over Kovytka.  And guess who will probably get control of that?  Sechin’s Rosneft.  Funny how that works.  Not funny ha-ha, for sure.  I’m sure BP isn’t laughing.