Streetwise Professor

November 5, 2010

The William Clayton Memorial Manipulation Rule

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Politics — The Professor @ 9:21 pm

Testifying before the Senate in 1928, Texas cotton broker William Clayton responded to an accusation that he had manipulated the market with this drily arch remark: “The word ‘manipulation’ . . . in its use is so broad as to include any operation of the cotton market that does not suit the gentleman who is speaking at the moment.”

I’m sure Mr. Clayton is long dead, but his spirit lives on in the CFTC’s just proposed manipulation rule.  It is broad, sweeping–and maddeningly vague.  It basically promulgates a we’ll-know-it-when-we-see-it-and-tell-you-when-we-do-(with-a-subpoena) “standard.”

The rule itself just regurgitates the language of Frank-n-Dodd.  The explanation of the rule contained in the Federal Register provides ample evidence that the Commission views the rule as a fishing license to catch pretty much anything that damn well strikes its fancy.  Some key quotes:

Likewise, the Commission proposes to interpret CEA section 6(c)(1) as a broad, catch-all provision reaching fraud in all its forms–that is, intentional or reckless conduct that deceives or defrauds market participants. [Emphasis added.]

. . . .

The Commission proposes to continue interpreting the prohibition on price manipulation and attempted price manipulation to encompass every effort to improperly [sic] influence the price of a swap, commodity, or commodity futures contract. [Emphasis added.]

. . . .

Consistent with judicial interpretations of the scope of SEC Rule 10b-5, the Commission proposes that subsection (c)(1) be given a broad, remedial reading, embracing the use or employment, or attempted use or employment, of any manipulative or deceptive contrivance for the purpose of impairing, obstructing, or defeating the integrity of the markets subject to the jurisdiction of the Commission. [Emphasis added.]

. . . .

The Commission proposes to continue interpreting the prohibition on price manipulation and attempted price manipulation to encompass every effort to influence the price of a swap, commodity, or commodity futures contract that is intended to interfere with the legitimate forces of supply and demand in the marketplace.   The Commission reaffirms this broad reading of the term “manipulation” with respect to new CEA section 6(c)(3), while also recognizing that manipulation cases are fact-intensive and that the law in this area will continue to evolve largely on a case-by-case basis.

It is quite clear from all this that the Commission wants broad authority, and the maximum discretion and flexibility, to reach any operation of the market that does not suit it at the moment.  Willie Clayton lives.

I’ve written before that by attempting to craft anti-manipulation rules that are so broad to catch everything, Congress and the Commission in fact make it very difficult to catch anything, including the most egregious manipulative conduct.  That is a real risk under the new rule, which just compounds the vagaries and definitional imprecision of the existing laws, regulations, and precedents by adding new ones.  What is a manipulative contrivance or device?  I have no clue–and the proposed rule provides none.

The Commission gives itself an out by saying that manipulation cases are fact intensive, and that “the law in this area will continue to evolve largely on a case-by-case basis.”

Well, that’s the problem, isn’t it?  Anti-manipulation laws have been on the books since 1922, and there have been quite a few cases brought under the laws.  But to characterize the result of this process as “evolution” would be far too charitable. “Chaos,” “confusion,” “muddle,” and/or “devolution” would be far more apposite.  And it got that way precisely, exactly, because Congress and the various regulators charged with enforcing the law did not provide any real structure or guidance, again acting under the misguided notion that a broader, less precise law would be a more effective one.  The problem is not that the CFTC has not possessed the powers to reach truly damaging manipulative conduct; it’s that it has employed these powers in a scatterbrained way.  And that has happened, in large part, because the relevant statutes are vague and provide no structure or guidance.

I’ve written ad nauseum for almost two decades on the problems in the law relating to market power manipulation.  Despite the fact that economics provides the logical and empirical basis to permit determination with considerable precision whether a market power manipulation has occurred; who committed it; and whether he intended to do so, the Commission has never succeeded in bringing a successful market power manipulation case.  (As the discussion in the Federal Register notice makes clear, the CFTC’s much ballyhooed victorious DiPlacido case was not a market power manipulation case.)  That is particularly disturbing because market power manipulation is likely to be the most damaging and socially costly type of manipulation that can occur in derivatives markets.

I’ve advanced recommendations as to how it would be possible to craft fairly specific rules that would make it easier to prosecute market power manipulations.  More specificity would make it more likely that the CFTC could actually crack down on truly damaging conduct.  Laying new broad, vague terms on top of old broad, vague terms won’t do that.

Just how, exactly, will the new rule address the problems that have stymied the Commission in cases like in re Indiana Farm Bureau? How does it correct the problems (most notably vagueness) that Judge Miller tellingly identified in Radley?  (It does address some of the issues relating to jurisdiction.)  Answer: not at all.  Meet the new rule, same as the old rule–at least in its defects.

Moreover, the vagaries of the new rule will inevitably create uncertainty in the minds of market participants about what conduct is and what conduct is not a “manipulative contrivance or device.”  More legal risk is not exactly what the markets need right now.

In other words, the new rule will raise the frequency of both Type I and Type II errors.  Truly manipulative conduct will continue to go unpunished, and perhaps aggressive but legitimate conduct will not suit some enforcement guy at some moment.  The new rule threatens to make all too real the old lawyer’s joke: “I won half the cases I should have lost, and lost half the cases I should have won, so justice was done.”  Not really.

In brief, the new rule doesn’t fix the well-known problems with the existing regulations, statutes, and decisions: it just repeats them, and arguably adds some more.  Since the reach of the new rule will be far greater than the old one–extending to every swap, for instance–the potential for damage is commensurately greater as well.

I found one part of the FR notice particularly amusing.  Specifically, there’s this “we don’t need no steekin’ economists” language:

The conclusion that prices were affected by a factor not consistent with normal forces of supply and demand will often follow inescapably from proof of the actions of the alleged manipulator.

. . . .

Cases of this nature, where distorted prices foreseeably follow from the device employed by the manipulator, do not require detailed economic analysis of the effect on prices.

Yeah.  And then there are all those other cases where conduct is not sufficient to infer price distortion.  Which happen to be the far most important ones.

I understand that a lot of lawyers don’t like to have to rely on economists.  I will pass over in silence why that’s true.  Suffice it to say that the lawyers would be more successful if the laws and regulations reaching economic conduct were based on coherent, precise economics, rather than gassy generalities about “devices” and “contrivances.”

Day of the Jackal

Filed under: Military,Politics,Russia — The Professor @ 4:38 pm

Russia is in the midst of another charm offensive, this time with Japan.

Not really.  Just kidding.  Instead, Russia is deliberately kicking dirt on Japanese shoes, in the form of a trip by Medvedev to the Kurile Islands.   These Godforsaken rocks in the storm tossed waters between the Sea of Okhotsk and the Northern Pacific, immediately north of the Japanese home island of Hokkaido, were taken by the USSR in the waning days of WWII.  The Japanese consider them theirs, but the Russians disagree, claiming them as spoils of war that are now indisputably Russian territory.  The two nations have been discussing the issue for years, but Medvedev’s visit–the first by a Russian or Soviet leader–incensed the Japanese, who howled in protest; they even withdrew their ambassador from Russia for consultations at home.  The Russians–or more specifically, Sergei “The Tarantuala” Lavrov–replied scornfully.  Lavrov said that the Japanese warning that a presidential visit would “seriously damage relations” was “an insult” to Russia, and that the Japanese objection undermined Russian territorial integrity.

Lavrov’s tender concern for territorial integrity is touching; I think I’m tearing up.  I’m sure he and the Georgians talk about it all the time.

Pavel Fulgenhauer presents an argument as to why Russia wants to retain control of the Kuriles.  Control of the Kuriles makes the Sea of Okhotsk a Russian lake in which they can station SSBNs with less fear of attack.  It is indeed true that the ability to mine the La Parouse Strait between Hokkaido and Sakhalin and the passages between the Kuriles makes it more difficult for US (or Japanese) subs to penetrate the Sea of Okhotsk to get at Russian boomers (if they ever get there–and if they have missiles that like, you know, actually work).  But the Sea is still accessible to anti-sub aircraft based in Hokkaido, so the protection is not complete.

But even if you grant Fulgenauer’s argument, that cannot explain why Medvedev made the extraordinary effort to visit the islands in full knowledge of Japanese sensitivities about them.  This was a calculated public humiliation of the Japanese, and anybody with multiple functional synapses a little knowledge of culture and history knows that the Japanese are extraordinarily sensitive to public loss of face.

And it wasn’t as if Medvedev just dropped by on his way to the store, or something. The efforts needed to make the visit truly were extraordinary.  The weather over the islands is usually appalling, and bad weather forced Medvedev to abort an earlier trip.  As it was, he had to fly to Sakhalin, change to smaller plane (no airport in the Kuriles being capable of handling his normal aircraft) and risk getting marooned there for an extended period by a bad turn of weather–which almost happened, in the event.  In other words, he had to work very, very hard to deliver this facial to the Japanese.

So why do it? One contributing factor is that this gave the elfin Medvedev an opportunity to strut his nationalist stuff with an eye on the upcoming presidential contest.  (I won’t say election–it is a contest that will be determined well before a single vote is cast.)

It is also likely just another example of Russia’s foreign policy opportunism.  Japan is reeling economically, and is reeling as well from a recent maritime confrontation with China.  Japan crawled away from the contretemps with China about as cravenly as you could imagine.  So, it’s no surprise that after this abject confession of weakness that Russia makes a jackal’s leap (think Churchill’s characterization of Mussolini’s invasion of Greece while the Germans were annihilating the Greeks in 1940).  (This article in the China Post, of all places, argues that the Russians are just taking advantage of Japan’s distress.)

Yes, Japan is weak, but it’s not like Russia is a colossus.  Every Japanese weakness–economic, demographic–is more than matched by a more acute Russian one.

And this is just another example, as if one were needed, of Russian short-sightedness.  As I wrote some weeks ago, referring to Walter Russell Mead’s analysis of the Japan-China face-off, bullying Japan is likely to be counterproductive to the bully.  Mead was speaking specifically of the foolishness of Chinese obstreperousness that only served to push Japan and other democratic Asian states closer to the United States, just at a time when there was considerable unease about the US-Japanese relationship (over Okinawa, especially).  Whereas Russians are usually pretty good at the divide-and-conquer thing, here they are playing try-to-conquer-and-unify.  Not smart, especially since the objective factors (geography, military force in the region, economics) are not on Russia’s side.

Yes, in the short run, playing the jackal to the Chinese tiger may generate some advantages, and may make Medvedev and assorted nationalist mouth breathers feel tough.  In the long run, however, it is self-defeating.  It just cements Russia’s reputation as a revisionist, opportunist power, which will have adverse military, economic, and diplomatic effects.  Not a good idea, when you’re really not a power in any sense of the word, except for nuclear weapons and a rather ambiguous energy weapon.

November 4, 2010

Mr. Cravaack Goes to Washington

Filed under: Politics — The Professor @ 3:27 pm

Rahm Emanuel has cultivated an image as a political killer:

No, the definitive Rahm Emanuel story takes place in Little Rock, Ark., in the heady days after Bill Clinton was first elected President.

It was there that Emanuel, then Clinton’s chief fund-raiser, repaired with George Stephanopoulos, Mandy Grunwald and other aides to Doe’s, the campaign hangout. Revenge was heavy in the air as the group discussed the enemies – Democrats, Republicans, members of the press – who wronged them during the 1992 campaign. Clifford Jackson, the ex-friend of the President and peddler of the Clinton draft-dodging stories, was high on the list. So was William Donald Schaefer, then the Governor of Maryland and a Democrat who endorsed George Bush. Nathan Landow, the fund-raiser who backed the candidacy of Paul Tsongas, made it, too.

Suddenly Emanuel grabbed his steak knife and, as those who were there remember it, shouted out the name of another enemy, lifted the knife, then brought it down with full force into the table.

”Dead!” he screamed.

The group immediately joined in the cathartic release: ”Nat Landow! Dead! Cliff Jackson! Dead! Bill Schaefer! Dead!”

Well, Emanuel and his erstwhile boss and fellow Chicago pol, Obama, have indeed proven to be accomplished political assassins.  Unfortunately for them–and fortunately for the rest of us–their victim list includes more than a quarter of the Democratic House delegation and several senators up for re-election.  “Alan Grayson! Dead! Rick Boucher! Dead!  Russ Feingold! Dead! Glenn Nye!  Dead!  Baron Hill!  Dead! Blanche Lincoln!  Dead!”  I could go on.  And on.  And on.

Tragically, the political-career casualty list did not include Barney Frank (which particularly bummed Mrs. SWP), Harry Reid, Barbara Boxer, and a few of the other egregious ones who survived.  And Battling Bob Etheridge is still hanging on.  But all in all, Emanuel’s and Obama’s fellow Democrats would have been quite relieved only to see their Congressional party decimated, rather than tri-decimated, as it basically was.

There is one particularly surprising payoff in the 2010 Political Career Dead Pool: James Oberstar of Minnesota.  Oberstar had been in Congress for 18 terms, and no Republican had represented his district since the 1940s.  But he was defeated by political newcomer Chip Cravaack.

This is quite personally gratifying as I know Chip.  Chip was my classmate at Navy, and indeed, we were in the same company at Navy–34–so we went through Plebe Summer and the next two years together, living the same life in the same place and dealing with the same people and problems.  (I won’t repeat the 34th Company anthem, because it’s not work safe:))  Chip was (and I am sure, still is) a straight shooter, affable, sincere, earnest, honest, dedicated, and an extremely hard worker.  A mensch, in short.  He served honorably as a pilot in the Navy, and in the Navy Reserve, and was a pilot for Northwest Airlines.

I learned over the summer via Facebook that Chip was running, and I followed his progress on FB.  I thought his was an admirable, but Quixotic quest.  Even though I thought that a wave was coming, I doubted that it would be high enough to turn established incumbents like Oberstar into political flotsam.  But Chip worked very hard, and did a yeoman’s job at retail face-to-face politics, while Oberstar played the distant Mandarin in far away DC.  Chip stoked real enthusiasm in the voters of MN-8, as demonstrated at the debates between the candidates.  In the end, it all paid off: Chip did the unthinkable, and ended Oberstar’s too long tenure.

It’s not quite Mr. Smith Goes to Washington, but it is an inspirational example of a private citizen who has worked real jobs his entire life putting down his tools and standing for office when he believed his country to be in danger, and prevailing against what probably seemed insurmountable odds at the time he embarked on his quest.

Chip is often characterized as a Tea Party candidate, and I am sure he would embrace the label with pride.  The sneering classes on the coasts and their urban enclaves have heaped scorn on people like Chip since the Tea Parties first coalesced in spring, 2009.  They have denigrated their intelligence, their beliefs, their motives.

Well I know Chip Cravaack, and I can say that he’s a solid guy, a serious guy, and a truly patriotic guy.  We need more people him in office, the sneerers be damned.  Chip is a true citizen politician, doing things the way the Founders thought it should be done.

Keep it up Chip.  Remember where you came from, and what you ran for–and what you stand for.  Congratulations and Godspeed.

A long way from when we were braced up against the wall on 8-3, no?  I’m proud to say I knew you when.

November 3, 2010

Repeat After Me: The Mandate Mantra

Filed under: Economics,Politics — The Professor @ 7:49 pm

Contrary to Obama’s self-deceptive analysis of his electoral debacle, it is evident that one of the two issues that turned a normal mid-term election loss into a historical pounding was widespread anger over Obamacare.  That, along with fiscal incontinence, is what galvanized the Tea Parties and swung large numbers of independents against Obama.  That is what radicalized many people–including Mrs. SWP.  There is a large constituency, clearly a plurality, and possibly a majority, in favor of repeal.  In the new House, the number of votes for repeal will almost certainly exceed the number of votes that Pelosi was able to muster for passage.

But Senate and Obama will almost certainly block any attempt to do that now.  That means that it is necessary for the Republicans to play a longer game, to lay the groundwork now for a strategy that has a chance for success in 2012.

In their cleverness, Pelosi and Obama and Reid et al actually gave the Republicans an opportunity to do that.  They quite deliberately pushed implementation of all of the major elements of Obamacare to 2013.  (Quite revealing, that; if they really thought it was going to be more popular than sex once people “saw what is in it,” why the delay?)  Which means that everything rides on 2012; Obamacare is not truly a fait accompli until later, and hence can conceivably be undone if Obama is out of the White House, and the Senate is more Republican, after the 2012 election.

Hence,  the strategy for repeal should be focused on influencing the 2012 election.

That strategy should focus intensely on one issue, and one issue only: the individual mandate.  That mandate is the least popular part of Obamacare.  But more than that, it is the essential element of Obamacare.  It is the keystone in the arch.  If it is removed, the entire structure collapses.

That’s because the whole structure is a huge redistributive scheme, and the sheep have to be held still in order to be sheared.  Or, to use another metaphor, just as serfdom required tying the peasants to the land so that surplus could be extracted from them, in order to extract wealth from one group in order to redistribute it to another it is necessary to keep the former from exiting the system and to force them to pay into it.*  That’s what the mandate does.  It forces some people to purchase overpriced insurance in order to subsidize the provision of insurance for others.  If people can choose whether to buy the insurance, many will not buy the overpriced insurance, and the scheme will rapidly become fiscally unsustainable.

There are other mandates in Obamacare that serve a similar function.  In particular, the dictats regarding the coverage that insurance companies must offer is also a stealth tax.  This forces some people to buy coverage that they will never use, and uses the money to subsidize the insurance coverage for others.  (Bundling by monopolists is a well-known strategy for extracting surplus.)

So the mandate is the keystone of Obamacare, and it is unpopular.  Pounding on the mandate, and day after day pointing out its true function as a huge, concealed, tax will only cement its unpopularity.  Focusing on this issue, with specificity, will force Obama and the other advocates of Obamacare to defend it.  That is unlikely to make them popular, and will either force them to make ludicrous denials that it is not a redistributive tax, or admit that it is.  It is a simple, focused, and powerful message, the kind that works best.

In my view, that is the only way to stop Obamacare–stopping Obama in 2012 by focusing on the most crucial, and the least popular, element of the health care monstrosity.  Perhaps being too clever by half, by pushing full-scale implementation past 2012, Obama and his Congressional minions have given the opponents of Obamacare a window of opportunity.  Those opponents need to use this window wisely.  They have to have realistic expectations that it cannot be undone with Obama in office, and craft a strategy that turns Obamacare into a crippling liability for 2012.

In brief: start chanting the mandate mantra at every opportunity.  Be patient.  Don’t expect immediate action.  Live with legislative defeats.  After each one, get up and start all over again.  Build the case–and the momentum–in a way that crescendoes in November, 2012.

This will require tremendous discipline and cohesion, and it is certainly unclear that a coalition of tired old Washington has-beens and never-weres (mostly in the Senate) and political newcomers have that discipline and unity.  But they will never have it unless they understand why it is so necessary.  If 2 November, 2010 is to have any lasting meaning and impact, the message has to be all mandate, all the time.

So, repeat after me . . .

*Which is why places like California and Illinois are, to put it bluntly, screwed.  They can’t force the productive to stay put and pay for bloated budgets.  (I hear Texas is nice!)  They will, no doubt, try to persuade the Federal government to bail them out, but the odds of that just went way down.  (Note to self: see what has happened to CA and IL credit spreads as it became evident that the House was going Republican in a big way.)  So, voters of CA and IL: good luck with Jerry Brown and Pat Quinn!  You’re going to need it.  We’ll leave the light on for you.

As So It Came to Pass, as Predicted Here

Filed under: Economics,Politics — The Professor @ 2:44 pm

On the day after the 2008 election, in a post titled “There is No Joy in Mudville,” I wrote:

My first inclination is to take a cue from DR [who you now know as “Sublime Oblivion”], and assume a Leninist “the worse, the better” attitude. Hope that Obama and Congressional Democrats rush to attempt to implement every policy wish that they have kept pent up inside for the last years–or arguably for the last 28, since Reagan’s election. Refashion completely the health care system, turning it into a government managed and financed system. Seize 401(k) accounts. Impose payroll taxes on every dollar earned. Dramatically increase the cost of energy by imposing draconian restrictions on CO2 emissions. Shove huge subsidies down “alternative energy” rat holes. Raise income taxes and capital gains taxes. Gut the military. Go all squishy when dealing with Iran and Russia. Sell Israel down the river. Restrict freedom of expression by imposing the “Fairness” Doctrine (an Orwellian expression if ever there was one.) Answer every policy dispute with accusations of racism, and criminalize speech deemed racist. All in the teeth of a recession.

You know they want to. They are almost ready to burst from the pressure of bottling up their intense desires for so long. Even the Clinton years were frustrating to them, a period of centrist triangulation after the retreat from Hillarycare.

The operative word here is “attempt.” I expect that if Obama and the extreme liberals that dominate Congress were to attempt to enact such an agenda–and it is the agenda of their desires–that even the dreamy types mesmerized by anodyne promises of change would awake from their reveries. Talk of unspecified “hope” and “change” allows the lazy listener to imagine the changes she or he hopes to see, and assume that Obama shares the same vision. (That’s how cons work.) Things are quite different when one sees the specifics, and comprehends the dramatic implications thereof. The resulting popular outrage would make the Clinton 1993-1994 explosion look like a dud firecracker. [Emphasis added.]

That’s what I expect would happen–but I am not sure. [Emphasis in original.]  There is the risk that it might not, and in the event, the costs would be catastrophic. Indeed, even if the probability of implementation of even a modest part of the agenda is small, the costs are so large that a rational, risk averse individual should recoil from thoughts of “the worse, the better.” Hence, I so recoil.

Obama and the hard-left dominated Congress indeed attempted to implement the agenda of their dreams, and succeeded in forcing through a good part of it.  Health care obviously tops the list, both on attempted and achieved.  Seize 401(k)–no, but there have been rumblings that something related to that is on the table for the lame duck session.  Cap and trade–made it through the House, but not the Senate, but even the attempt was hugely unpopular in vast swaths of the country. Subsidies down “alternative energy” ratholes–definitely.  Squishy with Iran and Russia–ditto.  Accusations that opposition was racially-driven–ditto.

And some more things into the bargain, far and away most notably a gargantuan “stimulus” program, and a general splurge in government spending that pushed deficits into the trillions.

And indeed, there was an election, the results of which in fact make the 1994 election pale in comparison.  Republican gains in the House are substantially larger than in ’94–the largest since 1946.  Republican gains in the Senate are equal, even though the realistic opportunities there were far smaller than in ’94.  The electoral rout at the statehouse level is even more astounding.

So, trying to be as objective as possible, I think it is more than fair to say that I foresaw yesterday’s demolition of Obamaism the very day after it was born; I predicted the rise of the Tea Parties before they had a name.  At the very time at which the only question that seemed to command attention was whether Obama would be more like FDR, Lincoln, or Jesus.  Maybe it was just a case of the blind hog finding the acorn, but I called this when hardly anybody saw it as even a possibility–and certainly when nobody that I know of was willing to say so publicly, even if they did see it.

And even though I take grim satisfaction in the repudiation of the Obama-Progressive agenda, and my foreseeing it, this is the coldest of comforts.  For as I said in the original post, the costs of that agenda are so immense because large parts of it have been implemented.  I would much rather have preferred that health care and Dodd-Frank and the stimulus and so much else had been stymied or gone down in flames, and live with a more equivocal election result, than to have those things enacted into law, thus sparking a powerful reaction.  The worse came to pass, and it was not better.  At best, the election will limit the damage that Obama and his Progressive allies can inflict going forward.

As to alternative explanations.  My favorite is “we were so busy being wonderful that we didn’t do a good job convincing everybody how wonderful we are.”  Yeah.  Keep going with that–and seal your electoral doom in the next election.  If the White House and its pilot fish in the press believe that a failure to communicate was their problem, they are delusional.  And delusion is not a good political strategy.  (Though California is bent on trying it.)  No, Americans understood perfectly well what happened, and what was at stake.  They tasted the dog food, and spit it out.  Obama is what economists call an “experience good”–and the experience was not good.

Obama, speaking at his press conference as I write, insists that it’s all the economy, and none of the other stuff mattered.  Again, keep on believing that, fool.  The fact is that with the economy as it is, his party would have lost seats, but nothing like the number they’ve lost; outrage over health care and spending in particular added an intensity to public revulsion that led to a wave election.

What’s more, the stagnating economy is a predictable result of the burdensome and intrusive policies of the administration.  Yes, the economy cratered in 2008, but in some respects, that should have been a boon to Obama: he could have taken credit for a normal recovery.  But his hyperactive statism has been a drag on the economy and prevented such a normal recovery.  You bought, you own it, pal.

Relatedly, the profligacy of Congress and the administration was wildly unpopular, especially when it failed miserably to achieve the promised results.

Another excuse is that the country is now ungovernable, the people’s expectations unrealistic, and Washington unchangeable.  This is the political version of Casey Stengel’s criticism of a Mets’ player: “He’s got third base screwed up so bad, nobody can play it right.”

Well, I heard the same things in 1979-1980.  The Malaise Thing and all that.  Funny, didn’t hear it from about late-1983 on.  Hell, it wasn’t heard much in 1981 or 1982 either.  This is the loser’s lament: I’m not a failure, it’s that the job is impossible.

No, usually, it’s that you’re a failure.

So what will happen going forward?  The conventional wisdom is for gridlock, and that’s probably right.  But I would note that the Republicans have some advantages.  In particular, the anxiety about government spending and borrowing is so acute that any reasonable plan to constrain spending and spending growth will be broadly popular, and extremely difficult to demagogue.  The Republicans have the initiative, the power, and the popular support on this issue, and can put Obama in a very difficult situation.

The current parlor game is “Will Obama Channel Clinton?” and triangulate successfully.  Many estimable people, such as Walter Russell Mead, think he will.  I do not.

Both objective and subjective factors persuade me that Obama will not be able to get the upper hand in the same way Clinton did in ’95-’96.

Objectively, the nation’s current problems are so much more acute, and the policy distance to be spanned so vast, that triangulation will be incredibly difficult.  In ’94, the deficit was less than 3 percent of GDP, and gross Federal debt about 60 percent of GDP.  Today the deficit is over 10 percent of GDP, and Federal debt around 85 percent of GDP, and fast on its way to over 100 percent–Japan territory.  In ’94, health care had failed to pass.  Today, Obamacare is a reality, and people will be reminded every day of its destructive effects, its costs, and the yawning gap between the promise and the actuality.  In ’94, Baby Boomers were nearing their 50s.  Today, they are reaching retirement age, with a commensurate ratcheting up in anxiety about the economic future–and often with underwater mortgages and ravaged 401(k)s to boot.  In ’94, the economy was growing–a natural rebound from the ’92 recession that benefitted Clinton.  In ’10, the economy is moribund.  In ’94, the financial system was not shaky.  You can’t say that today.

As a result, in ’94, triangulation involved things like welfare reform.  Not unimportant, but hardly a front burner issue for most Americans.  Then, the battles were over smaller matters, and the government’s fiscal constraints, though they seemed acute at the time, were nothing–nothing–as compared to today.  There was no pressing need then to deal with entitlements (though it would have been nice and foresightful had something been done), and the solvency of the country was not in question.  Battles were fought over much less consequential issues than those confronting us today.  All that makes it far, far harder for Obama to triangulate and grandstand.

This is particularly true inasmuch as his political base thinks he’s already been too accommodating to the opposition.  The election results in California in particular demonstrate the vast gulf separating the Progressive core of Obama’s support and the sentiment of the vast majority of the rest of the country.  Good luck triangulating that.

Subjectively, Obama and Clinton are worlds apart.  Clinton was the epitome of the pliable, plastic, protean politician able to reinvent himself at a moment’s notice.  Indeed, his problem leading up to ’94 was that he had essentially abandoned his centrist, New Democrat persona: it wasn’t that difficult for him to resurrect it, and do so credibly.

Obama couldn’t be more different.  He was never a New Democrat, and was in fact a made man in the faction of the Democrat Party that the New Democrats formed to combat in order to make the party electable again.  Moreover, personally, he is ideological, self-righteous and rigid to the point of brittleness.  (Again, see his press conference.)  Triangulating would not be a return to an old self: it would be a betrayal of his inner core.  (Both Obama and Clinton are narcissists, but Obama’s narcissism is even more extreme than Clinton’s, and of a type that makes him less capable of personal and political transformation.)  (And as for those who say that things would be so much different had Hillary been elected–dream on.  Hillary is far more like Obama in her ideological rigidity and her political tin ear than she resembles her husband.  Indeed, Clinton’s big mistake in ’93-’94 was turning over health care to Hillary.  She exhibited all of the traits that have come to haunt Obama.  The only difference was that Obama had a bigger and more ideologically committed Congressional majority than Clinton.)

So, I don’t see triangulation working for Obama, and I see him having a far more difficult political hand to play than Clinton did post-’94.

That said, re-election in 2012 is still well within his grasp.  For one thing, you can’t beat somebody with nobody, and right now nobody is all the Republicans seem to have.  There is certainly no one of the stature and reputation of Reagan, circa 1978.  Yes, Reagan had his baggage, but he was a known quantity with a large and enthusiastic base of support.

Moreover, it shouldn’t be forgotten that even though Jimmy Carter was widely reviled and ridiculed in 1980; even though the country was humiliated by Iran; inflation was out of control; and on and on; he was ahead in the polls throughout the summer of 1980.  Indeed, the election was considered too close to call until the Carter self-immolated in the first debate (although Reagan helped strike the match with his “there you go again” retort).  Doubts about Reagan were great enough to make many Americans hesitate to vote for him, even over an abject failure widely ridiculed both without and within his own party.

Yesterday’s election results speak to this point.  The Republicans succeeded wildly in nationalizing the House races, and many races at the local level.  They succeeded far less at nationalizing Senate races and governor’s races.  In those races, personality played a much more pronounced role.  Money and advertising and more intense media coverage of individual candidates in Senate and governor’s races, in contrast to House or local races, makes it easier to personalize such a race.  Which is why Reid survived in Nevada, for instance, whereas Feingold went down in flames in Wisconsin.  Even though both their opponents were self-identified Tea Party candidates, Angle was readily portrayed as flaky whereas Johnson was too solid and accomplished a guy to suffer the same fate.

That makes it difficult–no, impossible–to prognosticate the 2012 presidential race without knowing who exactly Obama will face.  It is easy to think of candidates who would fare very poorly against Obama even if he and his policies remain wildly unpopular.  Right now there is no obvious candidate who has sufficient personal appeal to take advantage of Obama’s weaknesses.

But that’s not all bad.  In ’95, Bob Dole was the “logical” candidate (in the perverse logic of the Republican party).  He was tailor made to get hammered by Clinton.  There is no such “logical” candidate today, which means that there is a chance that the Republicans can find somebody who can exploit Obama’s vulnerabilities.

And those vulnerabilities will remain.  The mask has fallen from his persona, and people now see him for what he is.  Egocentric beyond belief, arrogant, condescending, ideological, partisan, and mean.  Health care will remain an albatross, and indeed, will become a greater liability as time passes.  My expectation is that the economy will remain sluggish.  Objectively he will be in a weak position, but it remains to be seen whether there is anyone who can take advantage of that.

At the end of “Mudville,” I wrote: “Adam Smith wrote that there is a good deal of ruin in a country. I think we are about to test the limits of how much there is in this one.”  We have indeed tested the limits.  Obama and his Progressive allies have pushed us far too close to ruin for comfort.  The best thing that can be said about yesterday’s election is that we have a chance to avoid pushing those limits yet further.  God willing.

November 1, 2010

Gazprom and Igor Sechin: The Dale Carnegies of Gas

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:47 pm

Several Gazprom related stories, with a common (and all too familiar theme): the company’s rather unconventional ways of trying to win friends and influence people.  Unconventional, except for the Mafia, perhaps.

First, Mr. Charming, Oleg Sechin, went to Turkmenistan along with Medvedev, and went on at length as to how Ashgabat should run its gas business.  Don’t ship gas to Europe.  Don’t ship it to China.  Ship it across Afghanistan (!) to Pakistan and India.  Oh, and by the way, if you “choose” the latter alternative, of course Gazprom is willing to “help” in whatever way it can:

Russia’s top energy official, Igor Sechin, who accompanied Medvedev and met the Turkmen president, said Russia was interested in taking part in Turkmenistan’s Subcontinent pipeline project.

The Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, conceived in Soviet days, never got off the ground. But last month plans to build it were revived after the four countries signed an new framework agreement. [ID:nSGE68J0M0]

“The issue of Gazprom’s participation in the TAPI gas pipeline was discussed during this visit,” Sechin, told reporters.

“Gazprom may participate in this project in any capacity — builder, designer, participant, and so on,” said Sechin, adding Gazprom, (GAZP.MM), Russia’s state-owned energy giant, would consider importing more gas from its southern neighbour.

Sechin pointedly suggested that Turkmenistan fuggedabout sending gas to Europe:

Sechin, however, went out of his way to discourage Turkmen gas exports to Europe. He insisted that European gas markets could hardly absorb Turkmen gas in the years ahead, due to depressed demand and diversification of supply from sources other than Turkmenistan. He stated, repetitively, that the EU-backed Nabucco project had “no future” due to insufficient gas supplies (an outcome that he promoted by trying to discourage Ashgabat from participating). Moreover, Sechin claimed, Russia’s South Stream project will advance faster than Nabucco, preempting gas resources and making Nabucco redundant. He implied that Ashgabat shared his views; an insinuation rebuked six days afterward in Ashgabat’s statement.

There is some dispute about what Sechin said, or implied, about Turkmen gas shipments to China.  Two analysts quoted by Reuters assert that Russia wants to divert Turkmenistan from China:

“And second, it is in Gazprom’s interest to divert Turkmen gas flows away from markets desired by Gazprom, from Europe and from China. China is a coveted market for Russians and Turkmenistan has already taken out a big bite,” Nesterov said.

In December 2009 Turkmenistan commissioned a 1,833-kilometre (1,139-mile) China-bound gas pipeline, which runs through Uzbekistan and Kazakstan to China’s north-western Xinjiang region.

China receives 24.5 million cubic metres of Turkmen gas a day via the pipeline. In 2012-2013 this will equal 40 bcm, almost as much gas as Russia used to import. Meanwhile, Russia is also attempting to boost its own gas exports to China.

“If Turkmenistan gets its own pipeline to India, or an alternative route westward, like it did with China, Gazprom can no longer negotiate from a position of power,” said Alexei Kokin, an oil analyst at Ural Sib.

Vladimir Socor claims, however, that Sechin strongly encouraged Turkmenistan to pursue opportunities in China:

Conversely, Sechin encouraged Turkmenistan to increase gas exports to China, an “almost infinite market” that could absorb both Turkmen and Russian gas.

Some comments.  First, it appears that Sechin doth protest too much about the poor export opportunities to Europe.  His remarks in this regard were clearly just another sally in Russia’s ongoing campaign to choke off competition for Russian gas in Europe, and to keep the Europeans in Gazprom’s thrall.  If the European market is so bad, why is Gazprom so eager to build not one but two pipelines there?  Second, Russia wants to hamstring Turkmenistan’s efforts to direct its gas to Asia and the Indian subcontinent, and what better way to do that than to get Gazprom involved in some way. Gazprom involvement in a pipeline means (a) higher costs, (b) chronic delays, and (c) the ability to interfere with the marketing of Turkmen gas.  Turkmenistan would be well advised to steer well clear.

And it may be doing just that.  Ashgabat responded sharply to Sechin’s remarks, basically telling him–and Russia–to shove it:

urkmenistan’s Foreign Ministry accused Russia of interfering in the country’s attempt to develop international energy ties following Russian claims that the European gas market had no place for Turkmen natural gas.

“Turkmenistan views the published remarks as an attempt to interfere in the normal course of international energy relations, and cast doubt on our responsibilities to our partners,” the Turkmen ministry said in a statement on its website today.

. . . .

“Deliveries to Europe have become more realistic ever since Russia lowered its purchases of Turkmen gas,” the ministry said in the statement. “Turkmenistan will continue to develop European aims in its energy policy.”

Smart move.  Turkmenistan seems to have learned its lesson from The Producers episode of April, 2009, during which Russia caused an explosion in the pipeline from Turkmenistan because it no longer wanted to pay for the gas that it thought it had been so clever buying the year before.

I once said that Turkmenistan was so close to Russia, so far from God.  I can’t speak about its distance from God, but it is clear that it is moving away from Russia, which is a good thing.  Hopefully that even the Europeans and Americans are not so clueless as to miss out on this opportunity to put a crimp in Gazprom’s plans.

Second item: Gazprom wants India’s stake in Sakhalin I, and will supply LNG in exchange:

OAO Gazprom is considering supplying liquefied natural gas to India in exchange for the 20 percent stake in the Sakhalin-1 project held by state-owned Oil & Natural Gas Corp., the Indo-Asian News Service reported citing Stanislav Tsygankov, the head of foreign relations at the Russian company.

Gazprom is considering this, you see.  Uhm, what about the Indians?

Given Gazprom’s track record in Sakhalin, most notoriously Sakhalin II but also it’s leaning on XOM to prevent it from selling Sakhalin I gas to China (something I wrote about last year) makes me very skeptical about Gazprom’s motives in this case.  Moreover, reading “Gazprom” and “LNG” in the same sentence pegs my BS meter.  The gap between Gazprom’s talk and its walk on LNG is huge.  Essentially Gazprom is asking ONGC to give up something valuable today on the promise of getting something that Gazprom has a poor track record of delivering.  India should take a pass.  It will be interesting to see, though, whether Russia will let it take a pass, or whether this is one of those offers not to be refused.

The last item: apparently the new bonds of fraternal friendship between Great and Little Russia, I mean Ukraine, don’t extend to gas:

Russia and Ukraine were unable to agree a new gas supply deal sought by the cash-strapped Ukrainian government on Wednesday, leaving the threat of a new year gas war hanging in the air.

In January 2009, a pricing row between Moscow and Kiev resulted in a stoppage of Russian gas flows to Europe for about two weeks, tarnishing Russia’s image as a reliable exporter and spurring a European quest for new suppliers.

The two ex-Soviet nations will continue gas talks, senior Russian officials said on a visit to Kiev on Wednesday, indicating Moscow continues to seek control over Ukraine’s transit pipelines as a condition of a price discount.

Ukraine depends heavily on imports of Russian gas, governed by a 10-year deal struck in 2009. But Kiev, which tranships 80 percent of Russian Gazprom’s (GAZP.MM) gas bound for Europe, says the current agreement is unacceptable.

Winter is coming.  I hope the Europeans have topped off their storage.

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