Streetwise Professor

My friend from undergraduate days at Chicago, David McFadden, blogs from time to time at Chicago Boyz, which is an excellent blog.  He has a good post today on yet another, but less well known, administration anti-growth policy: check it out.

It’s no secret that I despise Tom Friedman.  So perhaps it will surprise you to learn that I actually agree with something he wrote.  Discussing the Russian spy flap after returning from vacation (H/T S/O via R–never thought I’d write that), he says:

Everything the Russians should want from us — the true source of our strength — doesn’t require a sleeper cell to penetrate. All it requires is a tourist guide to Washington, D.C., which you can buy for under $10. Most of it’s in the National Archives: the Bill of Rights, the Constitution and the Declaration of Independence. And the rest is in our culture and can be found everywhere from Silicon Valley to Route 128 near Boston. It is a commitment to individual freedom, free markets, rule of law, great research universities and a culture that celebrates immigrants and innovators. [Emphasis added.]

Now if the Russians start to find all that and take it home, then we’d have to start taking them more seriously as competitors. But there is little indication of that. Indeed, as Leon Aron, director of Russian studies at the American Enterprise Institute, noted in a recent essay, President Dmitri Medvedev of Russia just announced plans to build an “Innovation City” in Skolkovo, outside Moscow. This “technopolis” is planned as a free-enterprise zone to attract the world’s best talent.

There is just one problem, notes Aron: “Importing ideas and technology from the West has been a key element in Russia’s ‘modernizations’ since at least Peter the Great in the early 18th century. … But Russia has tightly controlled what it imported: Machines and engineers, yes. A spirit of free inquiry, a commitment to innovation free from bureaucratic ‘guidance’ and, most important, encouragement of brave, even brash, entrepreneurs who can be confident they will own the results of their work — most certainly no. Peter and his successors sought to produce fruit without cultivating the roots. … Only a man or woman free from fear and overseers can build a Silicon Valley. And such men and women are harder and harder to come by in Russia today. … Disgusted and scared by the lawlessness and rampant corruption. … Russian entrepreneurs are investing very little in their country beyond their immediate production needs.”

Agreed.

Now that I’ve given Friedman an attaboy, I will proceed to take many times that number away.

For Friedman’s main objective in this column is not to point out Russia’s structural economic problems.  Instead, it is to take a left-handed slap at the US.  (Of course, since Friedman has two left hands, what other kind of slap could there be?)

In his telling, Russia vs. US is a battle of washed up has beens: it is like “one of those senior tennis tournaments — John McEnroe against Jimmy Connors, long after their primes — or maybe a rematch between Floyd Patterson and Sonny Liston in their 60s. You almost want to avert your eyes.”

No, Friedman would be proud if we were being spied on by Finnish schoolteachers, Singaporean bureaucrats, Hong Kong securities regulators, or South Korean bandwidth investors (what is it with liberals and their bandwidth fetish?), because they’re all the best in the world and the US is a lackluster failure in these areas.

Earth to Friedman: lack of Finns is not the problem in US schools.  That is attributable directly to a group of individuals whom, I am sure, are among his biggest boosters.  And Hong Kong securities regulators?  Is he serious?  (Cf., Rusal, IPO of.)

But the fact that the US isn’t best in everything is neither here nor there.  (The Finns suck at basketball.  So?)

No, what is amazing is Friedman’s colossal inconsistency.  He nearly wets himself  when he writes about China.  He aches with envy at the Chinese ability to dispense with niceties like due process, property rights, division of powers, etc., so that they can act as enlightened despots, bringing a Green prosperity using Red methods.

But here Friedman says that what makes the US thrive is: “a commitment to individual freedom, free markets, rule of law, great research universities and a culture that celebrates immigrants and innovators.”  None of which are present in China, and the lack of some of which on other occasions Friedman has identified as the reasons why China will be the dominant power in the coming century.

Well, which is it?

But wait, it gets better!  The Chinese spy on us like crazy.  So, by the Friedman You Judge Somebody On the Basis of Who Spies on Them Theory, we must be really great!  After all, if the Wave of the Future spies on us, we must be soooo special, right?

Make up your mind, son.

Consistency, it appears, is not the strong suit of New York Times columnists: another of my bêtes noir, Krugman, gets a glorious smacking for his head-spinning flip-flops here.

So why does anyone take these people seriously?

I won’t testify to Conrad Black’s ethics or business acumen, but he is a good writer and a decent historian who has some interesting takes on things.  Something in a recent Black piece caught my eye as a counterpoint to Lavrov’s claim that it is Russia’s “historic mission [to save] Europe from forced unification” (a thinly-veiled jab at NATO, btw).  Black argues that the world would have been a better place had Napoleon prevailed in Russia:

These lamentations of what might have been are generally fruitless and tiresome, but can be useful, because the perverse topiary work of historians often needs questioning. I will not agitate the horses in this stable with further reflections on the American Revolution. But the defeat of Napoleon in Russia, from which Britain more than made up for its échec in the New World, is generally reckoned a good thing.

Apart from a few obscure Frenchmen, I am the only historian I know of who recognizes what a disaster the defeat of Napoleon in Russia was for the world. As a result of it, the Russian nativists prevailed over the Western-emulating successors of Peter the Great and traditionalist myth-makers led by Tolstoy put over the fraud of the nobility of medieval, barbarous, yet somehow Holy Russia, with its hopeless serfdom, mindless oppression of the dull Slavonic masses, pogroms, and indifference to Dostoyevskyan, not to say Stalinist, violence.

Napoleon, as Goethe and Beethoven famously decided, was no great agent of democracy. But by his lights, and certainly by the primitive standards of Eastern Europe, he was an agent of enlightenment. If he had been able to assert any influence at all on Russia, as he did on most of the rest of Europe, he would have ended serfdom, created some sort of legislative tradition, and modernized the creaking Russian state. He would have anchored Russia in the West, as Churchill, Roosevelt, Truman, Eisenhower, de Gaulle, Kennedy, Nixon, and Reagan, working with Adenauer and Kohl, anchored Germany in the West. The lives of Lenin and Trotsky would have been the longer and less violent annals of Ulyanov and Bronstein, and the life of Stalin, the Siberian bank robber Djugashvili, shorter and less consequential. Charles XII was an adventurous, swashbuckling Swedish parvenu, Hitler a genocidal maniac; Napoleon was the only serious invader Russia has had who would actually have improved the country, however inexcusable his presence in the country at the head of the Grande Armée was (and inexcusable it was).

Interesting, and provocative.  I too am no real fan of counterfactual history.  It is an ill-posed problem.  But it cannot be gainsaid that massive social and legal change followed in the train of Napoleon’s armies.  Many of the changes were modernizing and salutary.  (Which is why aforementioned Goethe and Beethoven were originally supporters of Napoleon.  Beethoven composed the Eroica Symphony in Napoleon’s honor, only to rip Napoleon’s name from the title page after he declared himself Emperor.)

I’m not going to spend too much time on this, because considering the might have been is for the most part an idle endeavor.  But it is a quite contrasting take to Lavrov’s.  Whereas Lavrov adopts an almost Nicholas I-esque attitude of Russia as the savior of Europe from its own demons, Black argues that at least one of those demons would have done Russia some good, and made the world a better place.

Feel free to discuss among yourselves.

While doing her research at Heritage, Renee came across this 2000 article in Regulation by Thomas Oatley. It discusses the Basel capital standards, and is amazingly prescient:

Faced with this simple risk classification scheme, banks altered their lending behavior in ways that  regulators did not expect. For example, the risk classification provides incentive for banks to hold riskier loan portfolios than they would have held otherwise. Because the regulations assign the same risk  weighting and capital costs to all loans within a given category, banks have incentive to shift toward higher-risk, higher-interest assets within each category. For example, a loan to a triple-A rated corporation receives the same risk weighting as a loan to a heavily indebted start-up firm, even though the loan to the start-up has a much higher probability of default. Because the banks charge higher interest to the start-up, they are more inclined to make that loan than to lend money at a lower interest rate
to the secure corporation.

The risk classification scheme also offers incentive for banks to engage in regulatory capital arbitrage. When capital requirements are not based on a standard like the probability of insolvency, banks can often restructure their portfolios in order to reduce their regulatory capital requirements without reducing their risk. By securitizing assets, banks can unbundle and repackage risks to transform on-balance sheet assets into off-balance sheet assets that fall into lower risk weight categories. While reliable information on the scale of regulatory capital arbitrage is not available, the Federal Reserve has estimated that securities used to engage in regulatory capital arbitrage account for more than 25 percent of total assets of the United States’ ten largest banks. In several individual cases, those securities account for close to 50 percent of total assets.

The problems created by regulatory capital arbitrage pertain less to the off-balance sheet assets and more to the on balance sheet assets. Banks can only securitize high quality assets at acceptable cost; thus, regulatory capital arbitrage moves higher quality assets off banks’ balance sheets in operations referred to as “cherry picking.” This causes the average credit quality of banks’ on-balance sheet assets to deteriorate as high quality assets disappear and low quality assets remain. Against this lower-quality  balance sheet, the Basle Accord’s eight percent capital requirement may be insufficient and banks’ capital ratios may provide a misleading measure of banks’ true financial condition. Because market participants use capital ratios to determine the health of lending institutions, the weakened quality of this information may harm market discipline. [Emphasis added.]

That is an eerily accurate description of a process that accelerated in the 2000s, and culminated in the Financial Crisis.  Whether it was AAA CDOs or Greek government debt, banks loaded up on investments that received highly favorable capital treatment under Basel.  And it was those things that blew up the banks–and could blow them up again.

Ironically, Basel was intended to increase the rigor of capital regulation to make banks safer.  But as I’ve written repeatedly over the past year, capital requirements essentially impose price controls.  In this instance, the prices relate to risk.  But the price controls underprice some risks, and those are the ones that attract financial institutions like moths to the flame.

Enhanced capital requirements are again being touted as a way of preventing the next crisis.  But the Basel Rules were a response to a crisis–the Latin American debt crisis–that paved the way for the next one.

If the incentive system encourages financial institutions to take on tail risks (due, for instance, for implicit government guarantees), those institutions will find the vulnerabilities in the capital requirements through which they can smuggle such risks onto their balance sheets, like hackers identifying and exploiting each new vulnerability in Windows.

The existence of vulnerabilities is inevitable–no centrally created set of risk prices will be even close to right.  Which means that enhanced capital requirements provide a false sense of security.

The problem is that the ability of the institution that can price risks more accurately–the capital markets–is fatally undermined by the very real prospect of bailouts of institutions that fail.  That is the Original Sin, and as long as we remain in that fallen state, a future crisis is almost inevitable, capital requirements or no.  Indeed, the main effect of capital requirements as implemented will be to determine exactly what causes the crisis, not the likelihood of its occurrence.

In Russia, everything seems to be an excuse to drink.  I’m happy!: I’ll drink!  I’m sad: I’ll drink.  I’m cold: I’ll drink.  And now, in the midst of a heat wave, the game is: I’m hot!  I’ll drink.

And the consequences are appalling:

Dozens of Russians, unduly fond of their national tipple, are drowning daily as they stream to water to escape the record-setting scorching heat, a senior emergencies ministry official said on Wednesday.

Vodka-drinking groups — some with small children — can be seen at lakes and ponds in and around the Russian capital where the current three-week heatwave may set a new all-time record of 37 Celsius (98.6 Fahrenheit) this weekend.

“Russia’s Emergencies Ministry is very worried by the current situation. In the last day alone, 49 people drowned (in Russia), including two children, Vadim Seryogin, a department head at the ministry, told a news conference.

Forty-nine in a day.  By contrast, in the US, a country with double the population, averages about 74 drowning deaths per week. (It would be interesting to learn whether Russia’s already astronomical vehicular death rate has spiked to.)

Some of the stories are especially gruesome, like the 6 children who died in the Sea of Azov while their summer camp counselors were stupefying rather than supervising.

I appreciate that the heat–in the mid-90s F–is very difficult for people to deal with.  I split time between Houston and St. Louis, which are beastly in the summertime: forecast highs for Houston are mid-90s through the entire week.  But natives are used to it, and more importantly, air conditioning is ubiquitous.  In Russia, in contrast, people aren’t used to it, and air conditioning is a rumor: I almost suffocated in a Moscow hotel room in late-August when the temperature was merely in the 80s F. I can imagine that it is nearly intolerable under current conditions.

But even given that, this spate of drownings is dumbfounding.  In the US, heat waves in inner city areas (where AC is less common) lead kids to play in the hydrants, and go swimming more frequently.  There are more drownings, but the rate and the delta of the rate is nothing by comparison with what is being reported in Russia.

And the difference can, apparently, be distilled down to one thing: spirits. Which is pretty amazing, because I never considered getting sh*t faced to be all that refreshing.

A very strange thing indeed.

There are rumors that ExxonMobil is considering a takeover of BP.  I have no firm opinion on the likelihood of such a combination.  But it would be a challenge to combine these two behemoths, for more than the usual reasons.  In particular, Exxon is not trading oriented, but BP is.  BP has an extensive and highly profitable trading operation, Exxon does not.  Indeed, recent experience (the trading joint venture with Duke Energy) probably did a lot to confirm Exxon’s belief that trading is far more trouble than it’s worth.

So what would happen, in the event of a merger?  Would Exxon spin off the BP trading operation?  But who would buy, since so much of the trading operation derives its profitability from trading around physical assets?  Would Exxon just shut down, or cut back, BP’s trading?  But given that  a non-trivial portion of BP’s profits come from trading, if it were to do that the price that XOM would be willing to pay might be considerably less attractive to BP.

All things considered, it seems like a most unnatural combination.

I have long been fascinated by Black Friday, 24 September, 1869.  On that day, a massive corner in gold collapsed, throwing the American financial system into chaos.

My initial interest in the subject stemmed from my interest in corners: the opening paragraph of my book on manipulation (#2,306,956 on Amazon!  Available on Kindle!) uses the story of the collapse of the Fisk-Gould gold corner as the hook into the subject.  The episode shows how corners work; how they can fail; and interestingly, illustrates some of the game theoretic aspects of corners.  Specifically, Fisk and Gould were in a prisoners’ dilemma, and in the event, Gould ratted out on Fisk, selling when prices were driven up at the end by a surge of Fisk buying.  When Fisk stopped buying, the price collapsed, leaving Fisk with a boatload of losses, and Gould with a nice gain.  (Gould was actually selling to his erstwhile partner Fisk in some of his trades.)

But Black Friday also relates to one of my other obsessions–clearing.  Since about 1997, I’ve used the story of Black Friday to show that (a) clearinghouses can fail, and (b) that the consequences of said failure are catastrophic.

Here’s the story in a nutshell.  Gold trading started in the US in 1862, when during the Civil War the US government issued fiat currency (“greenbacks”) and made them legal tender.  Almost immediately, there was speculation on the value of gold vs. paper dollars.  The business began in the streets of New York, but soon became big enough that interested firms and individuals started a Gold Exchange and moved the business indoors.  The business boomed during the Civil War, and the price of gold ebbed and flowed with Union military victories and reverses.

Originally, deals were settled by the delivery of gold to the buyers’ offices in exchange for cash.  This, of course, resulted in robberies, sticky-fingered messengers, etc.  So the Gold Exchange adopted rules permitting delivery of bank certificates signifying ownership of gold in vaults.  That resulted in the a fraud scandal in which a trader counterfeited gold certificates (shades of the CO2 market, circa 2009-2010!).

As a result, in 1866, a Gold Exchange Bank was chartered in New York.  The Bank operated a clearing division.  Each day, traders submitted settlement statements to the Bank.  The bank calculated net pays and net owes in cash and gold.  Traders delivered their net obligation to the clearinghouse, in exchange for net payments owed them.

The Gold Exchange Bank was not a mutual organization, like a modern CCP.  But it did back trades out of its capital.  The Gold Exchange absorbed any losses attributable to the failure of any broker, and made whole those who were owed money on the daily settlements.  Thus, like a modern CCP, it insured against default risk.

The system worked like a charm from its inception in late-1866 until Black Friday.  But on that day, clearances were many times larger than usual: the usual day saw about $80 million in clearances, but (incomplete) records for the 24th indicated clearances of about $350 million.  More importantly, several important brokers–namely those who traded for Fisk–didn’t submit reports, and didn’t pay anything into the clearinghouse.

Chaos ensued.  Those owed money were clamoring for their funds.  But there was a huge whole in the Bank’s accounts.  It owed money to those who profited from the price collapse, but hadn’t received the funds from those who had lost.  It tried to finesse the situation by paying out partial settlements to those owed money.  But a trader filed an injunction stopping the Bank from doing this, and appointing a receiver to handle the settlements.  The Bank was closed for some days while the receiver unwound the tangled mess of obligations.  The Bank ended up losing close to $500,000.

The failure of the clearinghouse brought the New York financial market to a near standstill.  Liquidity dried up, as vast sums sat in the Bank’s vaults awaiting resolution of its obligations: short term money was only available at a rate of 1 percent per day.   The freeze-up of the financial markets brought foreign trade to a standstill as importers and exporters could not obtain the typical finance.

There are other interesting aspects to the story.  For instance, the Bank’s (state) regulators were overwhelmed by the situation.

In a nutshell: a big price move makes some big traders unable to meet their obligations to the clearinghouse.  The clearinghouse has insufficient capital to make up the shortfall, and shuts down.  There are serious, broader market spillovers and impacts on the real economy: that is, the clearinghouse was deeply interconnected with the broader financial markets, and consequently, with the real economy.

An old example, yes, but an illustration that clearinghouses can fail in times of market stress, and that these failures can lead to substantial market dislocations.

The episode also provides some other cautionary lessons.  For instance, collateralization–margining–was common on gold trades.  Indeed, not only was there daily variation margining, traders often posted initial margins (“independent amounts” in current OTC market parlance).  So margining was not sufficient to prevent defaults in the face of large market moves.

In the gold market of the 1860s, the clearinghouse did not collect margins: they were collected by individual traders.  This would differentiate a modern CCP from the Gold Exchange Bank.  However, the episode demonstrates that collection of margins was not sufficient to prevent default, either by deterring default-risky speculation, or by effectively eliminating the credit in any derivatives trade.  (If the net settlements paid and received by the Gold Bank took the margins already collected by the individual traders into account, the fact that the Bank did not collect the margins itself would be immaterial.  In this case, the Bank would be on the hook for default losses in excess of margins–exactly as is the case with a modern CCP.  The historical record that I have examined is not specific on this point.)

In brief: Clearing does not preclude the possibility of Black Days, with defaults and metastasizing financial chaos.

The best primary source on the episode is testimony taken by Rep. James A. Garfield’s House Committee on Banking and Currency in its Gold Panic Investigation.  That document is available on Google Books.  There’s a lot of tedious stuff, a lot of tendentious stuff, but a few (ahem) nuggets that make the read worthwhile, especially using GB’s search capabilities.

One last thing.  In conjunction with more recent events, Congress’s investigation reveals government’s love-hate relationship with clearing.  In the recent Frank-N-Dodd legislation, clearing intended to be the panacea to prevent systemic crises.  In 1925, acting under authority granted by the Grain Futures Act, the Secretary of Agriculture forced the Chicago Board of Trade to adopt clearing in order to clamp down on excess speculation.

In the Garfield investigation, in stark contrast, clearing was routinely damned by many Congressmen as the cause of excessive speculation and a systemic crisis.  As the minority report put it:

We have no doubt that the clearing-house, which is a nuisance to legitimate traffic and commerce, and the Gold Exchange Bank, which was an instrument used for the certification of fabulous amounts not represented by money (the “phantom gold,” which played so conspicuous a part in the drama,) are obnoxious to the sweeping criticisms of the majority report.  The clearing-house gave great facilities for gambling.  Seventy millions a day was its general average, and not half of it legitimate business.

“You can,” says Mr. Fisk, “make more transactions through the clearinghouse with $5,000 than with $100,000 without it.”  Men without means are by it enabled to deal in immense sums of gold, or phantom gold. . . . The gambling hells of Hamburg are Monaco are not more pernicious as temptations.  Their evils are few compared to those inflicted upon all our country and its business by this time and labor saving machine [a description given of clearing by one witness] to facilitate gold gambling.

The majority resolved to tax the clearing system out of business:

That the Committee of Ways and Means be instructed to inquire into the expediency of reporting a bill to levy such a tax on such transactions as those of the Gold Exchange and the Gold Exchange clearing-house, as, in their judgment the interests of the country shall require.

So, depending on when you ask, clearing is either: (a) the savior of the financial system and a deterrent to destabilizing speculation, or (b) a catalyst of destabilizing speculation that threatens the stability of the financial system.  Damned if you do: Damned if you don’t.

The truth is, of course, it is neither.  Which all suggests that considerable caution is warranted in believing financial morality tales spun by Congressmen in high dudgeon, the heroes and villains of which are interchangeable from episode to episode.

Yesterday I wrote about the feckless response of the world generally, and the UN in particular, to the North Korean sinking of a South Korean naval vessel.  Well, based on an article I read today in Foreign Policy, I conclude that “feckless” is too feckless a word to describe the UN’s response:

Fast forward to today, when the United Nations released a presidential statement which not only does not specify any consequences for the Kim Jong Il regime, but doesn’t even conclude that North Korea was responsible for the attack in the first place.

The statement acknowledges that the South Korean investigation, which included broad international participation, blamed North Korea, and then “takes note of the responses from other relevant parties, including from the DPRK, which has stated that it had nothing to do with the incident.”

“Therefore, the Security Council condemns the attack which led to the sinking of the Cheonan,” the statement reads.

Go out on a limb there, guys.  I guess this was just sort of the immaculate explosion, or something.

The NoKos, who usually squeal like stuck pigs at even the most oblique criticism, had nothing to squeal about here.  They were quite smugly satisfied, thank you:

North Korea’s representative to the U.N., Sin Son Ho, called the statement a “great diplomatic victory.”

Why this result?  Chinese and Russian refusal to permit any criticism of North Korea, let alone any action against Kim Jung Il:

The South Korean official pointed at Russia and China as being responsible for the weakness of the statement.

“Definitely there has been a tough negotiation, especially to persuade the PRC and Russia, and this is result,” the official said, “All the other countries except [China and Russia] strongly supported putting pressure on them.”

The US, which at least said something semi-tough at the outset, has has gone full Stanley (“The Boneless Wonder,” in Churchill’s stinging description) Baldwin mode:

“I think right now we’re just allowing North Korea to absorb the international community’s response to its actions,” State Department spokesman Mark Toner said Friday.

Oh, they’re absorbing it all right.  And they’re absorbing it in Terhan, and many other unsavory places.  The lesson they absorb is that there is no price to be paid for the most flagrant acts of aggression.  And when something is free, people buy a lot of it.

This New York Times article presents another example, as if another is needed, of the defining characteristic of the Russian legal system.  Namely, that it is primarily a means by which the power/security structures prey on those whose property they want, or crush those with the temerity to challenge them.  Or, as the article says:

“There are laws in Russia, but the security services are beyond any laws,” said one of Ms. Kazakova’s lawyers, Dmitri Dmitriyev. “They act with total impunity. They can undertake special inquiries, collect information on people, violate fundamental human rights, put people in prison, keep them there as long as they want, manipulate judges and manipulate prosecutors. This case is just a demonstration of all this.”

The entire article is worth a read, but the parts about judges are particularly informative–and dispiriting.

A US judge once wrote that no man’s life, liberty, or property is safe while the legislature is in session.  In Russia, no person’s life, liberty, or property is safe while the FSB (and pretty much any other state security apparatus) is in action.  Which is always.

There’s nothing like a historical debate to get the juices jangling here on SWP, and methinks Sergei (“The Tarantula”) Lavrov has provided the material (H/T LR).  Where does one begin?  Where does one end?  There’s just so much here.

Lavrov is Orwellian in his invocation of Orwell:

It is difficult to interpret such attempts to politicize history as anything other than euphoria in the spirit of “winner takes all” (presumably in the Cold War), that is, the right to interpret history according to the well-known method so well described by George Orwell.

Lavrov then proceeds to politicize history in a quintessentially Orwellian fashion.

Here are some of the high points (or low points, depending on how you look at it):

The history of World War II has been rewritten many times. Elements of this approach, which was dictated by considerations of ideology and political expediency, were also present in the Soviet Union. At the same time, even during the Cold War nobody ever tried to equate the Nazi regime and the Stalinist dictatorship. It occurred to no one to compare the Nazi threat, which meant the enslavement and destruction of entire peoples, to the policies of the Soviet Union, which was the only force capable in the beginning of opposing the military machine of Nazi Germany and, in its final phase, of ensuring its defeat, which was accelerated by the opening, however late, of a second European front in 1944.

Nice of him to mention the “second European front in 1944”–but no mention of the earlier efforts.  More importantly, there is a very revealing lacuna here.  Yes, Naziism meant the enslavement and destruction of entire peoples.  But Stalinism, and Bolshevism generally, had a body count that rivaled Hitler’s: and among the people enslaved and slain wholesale by Bolshevism and Stalinism were Russians.  To say that the USSR was not monstrous in the same way that Nazi Germany does not imply that the USSR was monstrous in its own, special, murderous way.

Historical revisionism has been used to attempt to link August 23 and September 1, 1939 – the conclusion of the Soviet-German Non-Aggression Pact and Germany’s attack on Poland. These two events are taken completely out of historical context, ignoring the Munich Agreement of 1938, which led to the dismemberment and occupation of Czechoslovakia; the Anglo-German Declaration, which was signed at the same time and was essentially a non-aggression agreement between Great Britain and Nazi Germany (the so-called ” peace in our time” agreement); and a whole series of other events that prepared the way for German aggression and directed it towards the East. As always, the sequence of events was critical. Were it not for the Munich Agreement, much of what followed would not have occurred.

By denouncing the Molotov-Ribbentrop Pact the Russian Parliament has admitted that the Soviet Union made a mistake. And we are justified in expecting that in other nations which dealt with the Nazis it was done not at the political leadership level but at the political decision-making level. The West, like Soviet Russia, was not blameless. Why is this difficult to admit now that the Cold War has seemingly ended?

M-R is always good for a food fight around here, so let’s have at it.  Me first.

First, the linkage of 23 August and 1 September 1939 is not, as Lavrov suggests, a latter day invention of revisionists.  It was understood that the events were linked at the time.

Second, M-R was not foreordained by Munich.  Stalin made a deal in which he thought he would profit.  We’ve been over this before, so I won’t belabor it.  He was wrong in his calculation, but make no mistake: he made a calculation that he would advance his interests by dealing with Hitler.  Period.

Third, Lavrov’s implication here is that those in the West have completely overlooked Munich and heaped blame for the war only on the poor, misunderstood USSR.  That is complete bullshit.

Look.  I grew up in the United States during the ’60s and ’70s.  During that time, Munich was emblematic of the moral and strategic failure of Western governments.  Any proposal to make a compromise with international adversaries–most notably, the USSR–was met with accusations that such efforts would represent another Munich.  Every American president wanted to avoid another Munich at all costs.  One American president, Kennedy, wrote a book excoriating the weakness of the French and British over Munich.  I heard about Munich from the time I could remember: I seldom heard about Molotov-Ribbentrop.  To say, as Lavrov does, that M-R has been singled out for calumny while Munich has been swept under the rug is complete, utter, tripe. Only marginal loons like Pat Buchanan extol Munich.  It wasn’t difficult for virtually everyone in the West to come to honest grips with Munich before the Cold War ended.  It isn’t difficult now.

It is difficult to understand that the Western nations were prevented for reasons other than ideological preferences from implementing in 1945-1946 the principles that later led to the lessening of tensions during the 1970s, that is, from choosing to “engage” the Soviet Union. This would have encouraged Stalin to follow a moderate policy in Europe, but this chance was lost—not just for Europe but for the Soviet Union itself.

If it’s difficult for you to understand, Sergei, you are past all hope.  Yeah.  Sure.  Stalin would have been the soul of cooperation and moderation had the US and the UK just “engaged” him and not reverted to pre-war anti-Bolshi policies.  This is so self-evidently risible that it doesn’t require deconstruction.

What about the Phony War, which points to the unsavory plans of the Western Allies toward the Soviet Union in connection with Nazi Germany’s attack on Poland?

Who even knows what “unsavory plans of the Western Allies toward the Soviet Union” Lavrov is talking about.  Hey Sergei: Your paranoia is showing!  And about the Phony War.  Riddle me this: if the USSR, with the world’s largest military, was so incapable of taking on the Germans even with the potential support of Poland and perhaps the Western Allies that it was forced to treat with Hitler, how could you possibly expect the Western Allies to confront Hitler aggressively after Poland had fallen and the USSR was neutral?  And the USSR wasn’t so neutral, was it?  During the Phony War–and when the war turned anything but phony when the Germans attacked west–where did the Wehrmacht’s gas come from?  The fodder for its horses?  The food for its soldiers?  Do I need to tell you?

The establishment of a sustainable model of economic and social development—socially oriented with universal suffrage and supported by a significant middle class—was only possible during the Cold War and on the basis of new technology.

So just when is Russia going to adopt a sustainable model, then?

Freedom came from the East . . . .

Those who falsify history forget about what they gained as a result of the Red Army’s liberation campaign, including territory. The victory over Fascism and the events preceding the war, like it or not, gave all countries of Central, Eastern and Southeast Europe, as well as the former Soviet Union, their modern boundaries, which most members of the Euro-Atlantic family have no objection to. Would we like to return to the past—to a Europe burdened by the territorial problem?

Somehow, it seems to have escaped the notice of those in the path of the Red Army that anything approaching “freedom” came in its wake.  To suggest otherwise is truly Orwellian.  Moreover, I guess Sergei believes that the Poles, for instance, should overlook the inconvenience of nearly 50 years of brutal occupation because it gained territory in the aftermath of WWII.  Recall, moreover, that Stalin’s whole point of enlarging Poland was to gain territory under Soviet control at German expense.  It was hardly a gift to the Poles.  And if we want to discuss “territorial problems,” how about discussing, oh I dunno, Abkhazia, South Ossetia, Moldova?

Lavrov’s attempts at economic exegesis betray a cluelessness about the the subject which is very difficult to exaggerate:

It was in response to the “challenge of the Soviet Union and socialism” that Western Europe’s economic development model became socialist.

Uhm, post-War Western Europe was not a libertarian’s paradise, but it wasn’t an example of a socialist development model either.  The welfare state and socialism are two different things.

Erroneous conclusions were eventually drawn from the end of the Cold War. Some thought that in the absence of the “Soviet threat” it was no longer necessary to restrain market forces by government regulation, so that it now became possible to engage in “financial alchemy,” including the financial pyramids from which liberal capitalism began at the start of the 18th century. The devastating consequences of such shortsightedness and the unwillingness to understand the historical pattern that Europe followed in the “hothouse” conditions of the Cold War are all too obvious to ignore and continue along the same path. Moreover, this mistake should not be repeated in the sphere of “strict security,” which is no less important in terms of its consequences for the future of Europe.

I see, the end of the Soviet threat (scare quotes aren’t necessary, Sergei: the threat was real enough) led to the unleashing of capitalism, red in tooth and claw, which begat the financial crisis.

Yeah.  Whatever.  I mean this is totally ahistorical drivel.  Overlooking that the connection between economic liberalization and the financial crisis is extremely remote, even assuming such a connection, ask the question: when did this move to liberalizing economies in the West begin?  With Carter, tentatively, in the late-1970s, Thatcher in 1979, and Reagan in 1981.  In other words, at the height of the Cold War.  The Cold War waxed its hottest at any time since the early-1960s at precisely the same period that restraints on market forces were relaxed throughout the West.  So much for your theory of cause and effect.

I could go on, but I’ll stop here.  I’m sure that this is enough to get the comments flying.  Have at it, folks!

* For newcomers, and those who have forgotten.  Last year I gave a talk about Russian energy policy to a group of US Foreign Service officers.  (I’ll talk to another group in 2 weeks.)  Afterwards, one guy came up to me and related the story of an intelligence specialist, Russian by birth, who said: “Sergei Lavrov is fascinating, in the same way a tarantula is fascinating.”